The Coronavirus fear is well entrenched in the market. Resulting in our Aussie blue chips dropping like hot cakes. Against all the pessimism, fear and panic A2 Milk (ASX: A2M) managed to surge 8% while the market fell 5% over the past week. A2’s growth captured the eyes and wallets of investors. Because, many stocks with direct exposure to China plummeted in recent weeks.

Today we are discussing why A2 surged by 8% in a week, how the coronavirus will impact A2’s share price and whether the milk company is worth the investment?

Why is A2 up 8% this week?

A2’s impressive H1 financials last Thursday are a key factor driving the stock growth.

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Liquid milk, infant nutrition and a2’s other nutritional products climbed even higher, with each segment hitting record highs. The upward trend in each division resulted in a 31.6% increase in A2’s revenue, totalling $806.7 million.

A2’s infant nutrition sales growth was explosive, climbing 33% higher on Thursday. Especially as A2 experienced a 100% increase in Chinese labelled infant nutrition products. Liquid milk sales grew by 28.7%. Highlighting the success of A2’s strategy of expanding its store footprint across the US. While also  increasing the speed at which units are sold in Australia.

Moreover, NPAT surged by 21.1%, totalling $184.9 million. With infant formula and liquid milk sales being a key factor in the new profit record. Profit growth was coupled with a 20.6% increase in Earnings Per Share (EPS), totalling 25.15 cents.

To add the cherry on top a2 improved cash flow by 33%, closing with a balance of $618.4 million. Even though, a2 invested $84.1 million in marketing across china and USA the company’s cash flow is substantial.

It is fair to say that, with excellent profit figures, no debt and a significant cash balance, A2 milk continues to sustain a strong balance sheet for investors.

How will the Coronavirus impact A2 Milks share price?

Most companies with direct exposure to China are experiencing a downward trend in the share price. Could A2M suffer like the rest of these stocks?
The inflated coronavirus fear is causing people to stock up on long-life items and “camp in their homes” sort to speak. Initially, you would think that a decrease in foot traffic would decrease the demand for A2’s products.
However, the coronavirus panic is likely to keep the A2 growth train running. Why? Firstly, with people “camping at home” the decrease in physical store sales is likely going to be offset by explosive online sales.
Secondly, with babies being more susceptible to infection/death Chinese families will probably turn to a2 due to their perceived high quality.
Thirdly, with January and February sales being better than expected it seems the coronavirus epidemic is positively impacting A2. Thus, based on these 2 months it is possible that March will follow in the same upward trend.

 

Is A2 worth the investment?

Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.

A2 appears to be the Australian gift that keeps on giving to investors. Their impressive H1 financials speak volumes to their successful products, brand loyalty and current global market share.

With the demand for A2 infant formula and milk only increasing throughout the coronavirus it’s likely their FY results in June will be stronger.
Many brokers are changing their position on A2 milk. With Goldman Sachs ($18.70), Citi ($19.20) and UBS ($17.69) rating A2M as a Buy (Each brokers target price). However, do not base your investment decision off a brokers rating and target.
Personally, I would not jump on the a2 milk train immediately. Because the current market conditions have increased volatility around A2M. Meaning, a nice entry point is possible if the pick your timing wisely.

Here is our free, uncomplicated, and extensive ASX portfolio

https://youth-investment-group.com/portfolio/

 

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

 

Written by Patrick McLoughlin, Associate of YIG.

 

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