Is the A2 Milk share price a buy?

Tristan Harrison|February 12, 2020 11:04am|More on:AU8BKLCOH

Source: Company presentation

Is theA2 Milk Company Ltd(ASX: A2M)share price a buy today?

I think 2020 is going to be a very interesting year for A2 Milk. The fact that the share price has been as high as $17 and as low as $11.30 over the past year shows that investors haven’t been sure what to make of the infant formula company.

The company is now aiming for a higher earnings before interest, tax, depreciation and amortisation (EBITDA) margin in FY20 than it was under the initial guidance by the former CEO.

I think A2 Milk has a great long-term future. The fact that it’s growing in two of the world’s largest economies (the USA and China) with so many other countries that it can grow into is exciting.

At its annual general meeting (AGM) A2 Milk said it expects its US sales to be approximately $27 million, which would be a growth rate of 110%.

A2 Milk also said it expected 84% growth of China label infant nutrition sales to $135 million and 54% growth of cross border e-commerce infant nutrition sales to $155 million.

However, I have some coronavirus-related China concerns about A2 Milk’s FY20 result. We’ve already heard from several ASX businesses that the coronavirus is affecting their operationsinChina or earnings are being affected because of China. I’m referring to shares likeBlackmores Limited(ASX: BKL),Cochlear Limited(ASX: COH)andAumake International Ltd(ASX: AU8).

I’m not really concerned for the long-term about A2 Milk’s China growth though, it’s growing market share there and these types of infections usually disappear after a few months.

Foolish takeaway

A2 Milk is currently trading at 29x FY21’s estimated earnings. I think it’s good value for a long-term buy, but I’d want to wait to buy at least until A2 Milk provides some comments about China during this reporting season, therecouldbe some short-term disappointment.