A2 Milk shares are down 19% this past month. Is it time to pounce?

It's been a volatile year for the milk company.

| More on:
A woman is unsure as she pours milk into a glass, has it gone sour?

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of A2 Milk Co Ltd (ASX: A2M) have been heavily sold recently and are down more than 16% in the past month.

The specialist milk company now fetches $5.19 per share at the time of writing, holding onto a 22% gain for the year.

These levels might seem like an ideal entry point for investors hunting potential bargains in the ASX consumer sector.

But given the challenges A2 Milk has faced, is now the right time to add this ASX stock to your portfolio? Let's see what the experts think.

What's pressuring A2 Milk shares?

A2 Milk shares have struggled over the past year as the infant formula market in China continues to face headwinds.

According to the company's FY24 numbers, sales to China's infant formula market saw a sharp decline throughout the year, with volume down 8.5% and transaction value down 11%.

Management put this down to the unflavoursome recipe of fewer newborns, rising competition, and tighter economic conditions.

Despite these obstacles, A2 Milk achieved a 52% jump in revenue, clipping nearly $1.7 billion at the top line.

The company grew net profit by over 9%, boosting cash reserves by 28% as a result.

Then, in late September, China announced a raft of fiscal stimulus measures aimed at supporting the economy and lifting the country's highly leveraged property sector.

The package was 2 Trillion Yuan, equal to about US$28 billion at the time. Critical to A2 Milk however was the language from the Chinese Ministry of Finance.

It noted a chunk of the payment will be used to give $114 "per child" to households with 2 or more children.

With the stimulus measures announced, consumer staples stocks surged, and plenty of names in the nutrition sector caught inflows.

Such was the frenzy that lifted the bid on A2 Milk shares that the ASX intervened and hit the company with a "please explain" letter.

The excitement was short-lived, however, with shares retreating from highs of $6.46 on October 10. They now trade in line with their level just prior to the China stimulus announcement.

Broker insights: What's the verdict?

Turning to the broker crowd, there's a mixed outlook on A2 Milk shares. Ten analysts rate the stock a hold, and five rate it a buy.

The consensus target price is around $6.80. Meanwhile, forward estimates for A2 Milk is to earn 22 cents per share in FY25.

At the current share price of $5.19, this values the company at a multiple of 23.5 times earnings, meaning you'd pay $22 for every dollar of the company's profits.

Two brokers have turned constructive on the company in recent months.

Citi reaffirmed its buy rating with a target of $7.04 last month. The broker's rating is driven by the potential impact of Chinese government stimulus, specifically aimed at boosting birth rates and consumer spending.

Analysts speculate that additional parental allowances could support the infant formula market and potentially lift A2 Milk's prospects.

Meanwhile, Bell Potter recently upgraded its view on the company, rating it a buy in an October note.

According to my colleague Bernd, the broker raised its price target on A2 Milk shares to $6.10, which represents a more than 17% upside potential from current levels.

Foolish takeaway

A2 Milk shares have been under pressure lately, but the stock still has broker support. Both Citi and Bell Potter remain cautiously optimistic about the company's potential to navigate the Chinese market's challenges.

Zooming out, the stock is up more than 32% in the past year.

Citigroup is an advertising partner of Motley Fool Money. Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Consumer Staples & Discretionary Shares

Disappointed couple at a supermarket.
Consumer Staples & Discretionary Shares

1 ASX consumer staples stock down 20% to buy right now

Time to go shopping?

Read more »

A company manager presents the ASX company earnings report to shareholders at an AGM.
Consumer Staples & Discretionary Shares

What can owners of Coles shares expect at next week's AGM?

There will be plenty on shareholders' minds at the AGM.

Read more »

Businessman walking down staircase with suitcase, at sunrise
Consumer Staples & Discretionary Shares

How is the Domino's share price reacting to the CEO's departure?

Domino’s CEO Don Meij is stepping down after four decades with the pizza retailer.

Read more »

Young man sitting at a table in front of a row of pokie machines staring intently at a laptop. looking at the Crown Resorts share price
Consumer Staples & Discretionary Shares

Who unloaded $26 million worth of Star Entertainment shares?

They weren't prepared to bet on the company's future.

Read more »

A man looks a little perplexed as he holds his hand to his head as if thinking about something as he stands in the aisle of a supermarket.
Consumer Staples & Discretionary Shares

Should I buy Coles stock during this sell-off?

After its latest update, is this supermarket business a buy?

Read more »

A female Woolworths customer leans on her shopping trolley as she rests her chin in her hand thinking about what to buy for dinner while also wondering why the Woolworths share price isn't doing as well as Coles recently
Consumer Staples & Discretionary Shares

The Woolworths share price just hit a 52-week low: Is it a buy?

Is this stock in the bargain basket?

Read more »

Woman checking out new iPads.
Retail Shares

JB Hi-Fi share price lifts off on strong start to FY 2025

JB Hi-Fi held its AGM today and released its first quarter trading update.

Read more »

Woman shopping at a retail store.
Consumer Staples & Discretionary Shares

Coles share price climbs on Q1 update and $880m investment news

How did the supermarket giant perform in the first quarter? Let's find out.

Read more »