Upcoming Q4 report expectations, page-367

I think that the Bubs Australia Ltd (ASX: BUB)share price is a buy. I’m going to outline my bull case for it in this article.A quick overview of what Bubs doesBubs was founded in 2006 by Kristy Carr. The company sells a variety of products with a focus on infant formula products and baby food, particularly goat milk products. It also sells other goat milk products and Jersey milk products.Here are the main reasons why I think, at this share price, Bubs is a great business to buy:Strong growth with international earningsThe biggest point about the company is that it’s delivering strong results.Each result that Bubs releases shows strong revenue growth by the company. In the FY20 half year result it showed revenue growth of 37% to $28.75 million. In the quarter ending 31 March 2020, its revenue jumped by 67% to $19.7 million – up 36% on the previous quarter.Whilst the current revenue numbers it’s reporting aren’t big in absolute terms, compound growth could mean the company quickly becomes much larger if it keeps growing strongly at a high double digit rate.It’s the international growth that particularly excites me about the revenue growth. In the FY20 third quarter, Chinese revenue went up 104% and represented about a quarter of total sales. ‘Other markets’ revenue went up almost 20 times, with large growth into Vietnam – this segment now represents 12% of gross sales.Ultimately, a business with ‘potential’ needs to deliver the growth to grow its value and lead to a sustainable increase in the Bubs share price over time.I’m going to try to explain some of the points of why the Bubs revenue and the Bubs share price are growing so strongly.Expanding distribution networkA key part of success for a consumer product business is to get its products in front of more potential consumers. That means into more stores, more websites and more countries.In terms of exports, its products are going to China, South East Asia and the Middle East. The ‘other market’ regions are a big addressable market for Bubs.Bubs has made a number of deals to expand its distribution network. For example, it has distribution agreements with Alibaba’s Tmall and Beingmate.In Australia, Bubs products are sold across hundreds of stores with major distribution agreements with Chemist Warehouse, Woolworths Group Ltd (ASX: WOW), Coles Group Limited (ASX: COL) and Baby Bunting Group Ltd (ASX: BBN).Bubs recently signed a new deal to expand its distribution of organic grass fed infant formula with Coles and Woolworths. That announcement sent the Bubs share price higher by 10%.High level of control of its supply chainBubs boasts of being Australia’s only vertically integrated producer of goat milk formula, with exclusive milk supply from Australia’s largest milking goat herd after the acquisition of NuLac Foods.Last year the company announced the acquisition of the Deloraine manufacturing facility for $35 million. It was a key acquisition because, at the time, it was only one of 15 licenced canning facilities in Australia authorised by the certification and accreditation administration of China (CNCA) for physical importation into China under regulatory requirements administered by state administration for market regulation (SAMR). These approved manufacturers are key for getting product into China. At the time of the acquisition, the company also raised $31.4 million at a share price for Bubs of $0.65. It’s up 57% since then.Rising gross profit marginOne of the main factors for a market-beating ASX share is rising profit margins. Economies of scale are important.Bubs has reported a steadily growing gross profit margin over the past four results. In June 2018 the gross margin was 14%, in December 2018 it had a 19% gross margin, in June 2019 it had a gross margin of 21% and in December 2019 it had a gross margin of 24%.Bubs said it is doing effective cost management on a fixed milk price and more of the products sold are the higher margin infant formula products. In the December 2019 result the infant formula gross margin was 41%.As the business gets bigger, Bubs will become more profitable for each extra dollar of revenue generated.Cashflow positiveAn important stage for every fast-growth company is reaching cashflow status. The company has had to do a number of capital raisings at a lower Bubs share price to reach its current size and strength. When a business becomes cashflow positive it can start funding its own growth.In the three months to 31 March 2020, Bubs saw positive operating cashflow of $2.3 million. That’s not a lot, but the fact it’s now positive is a big plus. Bubs also had $36.4 million of cash on the balance sheet at 31 March 2020. It’s in a strong financial position. Good strategy and focused managementI’ve been very impressed by the partnerships, acquisitions and expansion that Bubs has done since it listed on the ASX.Kristy Carr and the team around her have done a great job of building the business into what it is today.It’s a good sign when the founder of the business has stayed with the business since it was founded. Mrs Carr’s holding is now 2.43% of the issued share capital. That’s not a large position, but it’s still worth over $13 million at the current Bubs share price.Foolish takeawayI think Bubs is one of the most promising ASX shares around. In five years I think Bubs could be a much larger business, making good profit with a strong international presence. At the current Bubs share price I’d be happy to start with a sizeable position for the long-term.