It seems a2 Milk Company Ltd (ASX: A2M) shares, Bellamy’s Australia Ltd (ASX: BAL) shares and Bubs Australia Ltd (ASX: BUB) shares have fallen off the radar of ASX investors.
About A2, Bellamy’s and Bubs
Bellamy’s, a2 Milk and Bubs are three of the biggest and most popular players in the infant formula market. A2 Milk is by far the largest of the three companies, with a market capitalization of close to $10 billion.
The three companies all rallied from the start of this year and gained a lot of attention, but they seem to have fallen out of favour over the last two months. What happened?
Trade War
What goes on in China has a huge impact on infant formula companies like Bellamy’s and a2 Milk because their valuations are largely based on the potential of the Chinese market. As a result, the infant formula companies almost become a proxy for how fearful investors are of the US-China trade war.
Around three weeks ago, news arrived from China that there could be plans to increase the amount of infant formula produced domestically rather than allowing unlimited imports from companies like a2 Milk and Bellamy’s.
As a result of the trade war fears, a2 Milk shares have fallen 15.7% from their April peak, while Bellamy’s and Bubs have fallen a staggering 32.3% and 39.4% respectively.
The question is, are they now undervalued?
Undervalued or Overvalued?
The share price declines show that investors perceive the trade war as a very real threat to the infant formula companies. Bubs and Bellamy’s, in particular, have proven to be extremely volatile recently.
Personally, the only one of the three companies I would touch right now is a2 Milk. I wrote about this in more depth recently, but basically, a2 Milk is the largest of the three companies and the only one with a significant market share in the Chinese infant formula market (around 5.7%).
If China is serious about cutting imports and boosting domestic supply, the first companies to lose will be the ones that are yet to establish a significant market share — namely, Bellamy’s and Bubs.
While a2 Milk faces a lot of uncertainty, I think it will prove to be the most stable of the three companies.
Ultimately, for growth over the short or medium-term, I’d look away from infant formula and towards one of the companies in the free report below.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
