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.
The case for Consumer staples
The S&P/ASX200 Consumer Staples Index (ASX: XSJ) has delivered -0.34% per year of capital growth over the last 5 years. That compares to the average of all ASX sectors of 4.10% over the same period. Let’s take a look at why you might want a consumer staples company like A2M in your portfolio.
Big dividends
While these types of companies might not be known for high growth, what they are known for is being solid dividend payers. While this applies to many consumer staples companies, A2M has been an exception delivering a yield of only 0.28% over the last 5 years. This goes to show that even if a sector is known for high growth or dividends, every company needs to be considered on its own merit.
Recession-proof
Ok, they may not actually be ‘recession proof’ but consumer staples companies definitely have an advantage over other sectors during downturns. By definition the products that they sell are staples, like food, beverages, and household products.
When a recession hits and consumers look to cut their spending, it’s always the discretionary spending that’s the first to go. Staples are a little more resilient, and so you’d expect a consumer staples company like A2M would hold up a bit better than others when things get tough.
Less volatility
The third advantage that consumer staples companies have is their low(ish) volatility. Because, like we said, their products are always in demand, these businesses don’t tend to be cyclical.
A commodity or resource company can be the victim of fluctuating market prices and seasonal downturns, but companies like Woolworths or Coles tend to have a bit more pricing power because of their market share and the consistent demand. So, growth may be lower than other sectors, but so is the volatility.
A2M share price valuation
As a growth company, one way to put a rough forecast 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 3.40x, compared to its 5-year average of 3.44x, meaning its shares are trading below their historical average. This could mean that the share price has fallen, or sales have increased. In the case of A2M, revenue has been growing over the last 3 years.
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.
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 A2M share price.
