A2 Milk Company Ltd (ASX: A2M) shares continue to be some of the most traded on the ASX in recent weeks.
According to CommSec, buyers and sellers have accounted for equal trade volume, indicating that while some investors may think they’re buying shares at bargain prices, others may be thinking the a2 Milk share price could drop even lower.
A2M share price chart
Strong underlying fundamentals
Despite the challenges that a2 Milk is currently facing, many of the underlying company fundamentals appear to remain intact.
Over the years, a2 has built an incredibly popular brand around a fairly uninteresting and commoditised product – milk. This has allowed the company to achieve consistent year-on-year revenue and profit growth. Even considering its recent trading disruptions, a2’s reputation amongst its consumers is likely to remain strong once conditions improve.
With all of a2 Milk’s infant formula products being sourced in New Zealand, this might provide some protection against additional trade disputes between Australia and China.
A long-term recovery for a2 Milk appears to be a strong possibility, with the resumption of international travel being the main catalyst that will hopefully revive its daigou and Cross Border E-Commerce (CBEC) channels.
While the daigou channel continues to struggle, a2’s other business segments appear to be performing quite well. In FY20, its United States liquid milk segment reported growth of 91.2% over the period, albeit off a relatively low base.
A2’s products sold directly in China through its Mother and Baby stores (MBS) segment is also improving, indicating a strong underlying demand for its products.
The bear case for a2 Milk shares
It’s widely known that China has been fairly reliant on importing milk-based products, with a2 Milk in particular being a large beneficiary. Given that daigou and CBEC channels have ground to a halt recently, it makes me wonder how the end-users of these channels have supplied themselves with similar products from other sources over the last 12 months, and if this means the daigou channel may not re-emerge as strong as it once was.
Considering that a2 Milk has downgraded earnings guidance three times within the last six months, I’m sure many shareholders may be bracing themselves for further downgrades.
I’ve noticed in other companies that profit downgrades often come in cycles, and I’ve personally been burnt trying to buy the dip… only for it to keep on dipping. In hindsight, I would’ve been much better off waiting for the first announcement that indicates trading conditions are beginning to improve, even if the share price might’ve jumped 10% by that point.
The current a2 Milk share price of around $8.70 appears to be good value for this quality business. However, if you are considering buying at these levels, it might be worth building a position and averaging down if you’re concerned that shares could drop further from this point.
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