The A2 Milk (ASX:A2M) share price looks great to buy this week

Tristan Harrison | October 12, 2020 7:25am | More on: A2M

At the current A2 Milk Company Ltd (ASX: A2M) share price I think it looks like a great buy this week.

The A2 Milk share price has dropped 16.4% since 25 September 2020. It has fallen by 28% since 30 July 2020.

When a great business falls by that much I think it can open up a really good buying opportunity.

What has been going on?

When A2 Milk delivered its FY20 result the company noted that there was continuing uncertainty because of COVID-19. It warned that were was the potential for a moderation of economic activity. A2 Milk said there could be an impact on consumer behaviour in its core markets, as well as participants within the supply chain, most notably in China.

The A2 Milk share price has been dropping from its height since then.

A couple of weeks A2 Milk gave an updated FY21 outlook. It said that it has seen flow-on effects from pantry destocking continuing into FY21 and disruptions to the corporate daigou and reseller channels. There has been reduced tourism from China and international student numbers, particularly due to the stage 4 lockdown in Melbourne.

A2 Milk is expecting infant formula sales in Australia and New Zealand to continue to be disrupted for the rest of the first half of FY21 because daigou represent a significant portion of sales. That’s why the company is expected domestic revenue to be materially below expectations in the first half.

In the first half of FY21, revenue is expected to be between NZ$725 million and NZ$775 million. That would be a revenue drop of 4% to 10%. A prediction of a revenue decline is quite disappointing.

However, A2 Milk is still expecting revenue growth for the full year. It provided FY21 revenue guidance of NZ$1.8 billion to NZ$1.9 billion. That would be annual growth of 4% to 10%.

But the market was expecting more, which is why the A2 Milk share price is down.

Why I think the A2 Milk share price is a buy

A2 Milk is one of the best businesses on the ASX. It has a growing distribution network, particularly in the US and China.

In the recent sales update, A2 Milk said that the underlying growth of its China infant formula brand is strong. Consumers in China still want A2 Milk products, it’s just taking a bit of time to get the products to them.

I don’t think a business should be sold down because of short-term issues. The Melbourne stage 4 lockdowns are getting close to being ended, which should help things. A2 Milk is growing its distribution to help direct sales in the countries that it’s selling in.

Remember, A2 Milk is still rapidly growing the number of stores that its products are being sold in throughout China and the US. Indeed, thousands of stores are getting added every year.

The fact that A2 Milk continues to grow its market share is compelling for long-term growth because it can take a while to win over new customers.

A2 Milk is now starting to sell products in Canada through its agreement with Agrifoods. Canada has a bigger population than Australia and New Zealand combined, so it’s a sizeable market for it to expand into. Further geographical growth is exciting in my opinion.

Foolish takeaway

The A2 Milk share price looks attractively cheap to me. It’s trading at just 23x FY23’s estimated earnings. It looks even cheaper when you include the large cash balance. Comparing that valuation to other popular ASX growth shares makes A2 Milk look like a much better buy in my opinion. I’d be happy to buy A2 Milk shares this week