The a2 Milk Company share price fell 20% in August: Is this a buying opportunity?

James Mickleboro|September 2, 2019|More on:A2

Source: Company presentation

In August the S&P/ASX 200 index recorded its first monthly decline of the year when trade worries and U.S. recession fears weighed on investor sentiment.

Whilst a good number of shares tumbled lower, some fell more than most during the month.

Surprisingly, one of the worst performers on the benchmark index during the period was the normally reliableA2 Milk Company Ltd(ASX: A2M) share price. It finished the month with a decline of almost 20%.

Why did the a2 Milk share price crash lower in August?

Whilst some of its decline was attributable to concerns over the U.S and China trade war, the majority of its decline was triggered by its full year results release.

Although a2 Milk Company delivered yet another year of strong growth, the market was expecting even more from the fast-growing company.

In FY 2019 the infant formula and fresh milk company posted revenue of NZ$1,304.5 million and EBITDA of NZ$413.6 million. This was a 41.4% and 46.1% increase, respectively, on the prior corresponding period.

However, its EBITDA missed earnings estimates by 2.7%, based on Bloomberg’s average analyst consensus.

Also weighing on its shares was management flagging lower margins due to an increased marketing spend in FY 2020, which led to most brokers downgrading their earnings estimates for the year ahead.

Whilst management appears to be doing this to support its market share growth in the United States and China, there are concerns that this may be an ongoing trend in the future. This could mean that its margins have now peaked and its growth could come at a higher cost moving forward.

Should you buy the dip?

Whilst I can’t say I’m overly surprised to see its shares come under pressure following its margin guidance for FY 2020, I think the pullback has brought its shares down to an attractive level and created a buying opportunity for investors that are prepared to make a patient buy and hold investment.

After all, its margins may have narrowed a touch, but its overall market opportunity remains large and the company has a significant cash balance that could be used to accelerate its growth through new product launches or acquisitions.

In light of this, I would choose it ahead of other China-focused shares such asBellamy’s Australia Ltd(ASX: BAL) andBlackmores Limited(ASX: BKL).