Looking for an ASX growth share? Try the A2 Milk Company Ltd (ASX:A2M) share price

The A2 Milk Company Ltd (ASX:A2M) share price is up 47.4% since the start of 2024. It's probably worth asking, 'is the A2M share price undervalued?'
The A2 Milk Company Ltd (ASX:A2M) share price is up 47.4% since the start of 2024. At the same time, the Woolworths Group Ltd (ASX:WOW) share price is 12.3% away from its 52-week high. This brief article explains why it could be worth adding A2M and WOW shares to your ASX investing stock watchlist.

A2M share price in focus

Founded in New Zealand in 2000, The a2 Milk Company is involved with the sale of products sold under the a2 brand which contain the naturally occurring A2 protein type.

The company is not responsible for producing any of its products itself. It has access to over 25 certified dairy farms across Australia where its suppliers handle the production process. Additionally, its instant formula products are produced by its supply partner Synlait Milk in New Zealand.

There are various claimed health benefits of a2 Milk, the main one being that it’s easier to digest than ‘normal’ milk, so some people that normally have trouble with milk can stomach it a bit better.

WOW shares

Founded in 1924, Woolworths is a retail operator in Australia and New Zealand with over 3,000 stores and over 100,000 employees. It is one of Australia’s largest companies in terms of revenue and market share.

Woolworths’ main operations include supermarkets (under the Woolworths brand in Australia and Countdown in New Zealand), retailing through its discount department stores under the Big W brand, and business-to-business (B2B) brands like PFD. However, its 35%+ market share of Australian groceries is undoubtedly its crown jewel.

Woolworths is a very popular choice for many ASX investors seeking dividend income. Historically, it has consistently paid a fully franked dividend, usually at a yield of over 3%, and offers a very defensive earnings stream with most revenue coming from consumer staples. Its competitive advantage is best summarised as scale (distribution, low costs, etc.) and proximity (most shoppers still shop based on distance to the supermarket).

A2M share price valuation

As a growth company, one way to put a rough calculation on the A2M share price could be to compare its price-to-sales multiple over time. Currently, A2 Milk Company Ltd shares have a price-sales ratio of 2.73x, compared to its 5-year average of 3.44x, meaning its shares are trading below their historical average. Please keep in mind that context is important – and this is just one valuation technique. Investment decisions can’t just be based on one metric.

Since it is a more of a ‘blue chip’ company, we could look at the dividend yield of WOW to determine its value. WOW is offering a historical dividend yield of around 4.31%, which compares to its 5-year average of 2.92%. The Rask websites offer free online investing courses, created by analysts explaining things like Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). They even include free valuation spreadsheets. Both of these models would be a better way to value the WOW share price.

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