The fresh milk and infant formula company’s shares ended the day 1.5% at $12.06.
Why did a2 Milk Company’s shares tumble lower?
As well as general market weakness, a2 Milk Company’s shares were weighed down by a note out of Citi.
According to the note, the broker has retained its sell rating and $12.20 price target on the company’s shares after competition increased for its infant formula.
Citi notes that rival Mead Johnson has announced plans to launch an infant formula product that contains only the a2 protein.
The broker believes this could be a challenge for a2 Milk Company as it will no longer be able to rely on its uniqueness to drive growth. Instead the company will have to leverage its brand and marketing to support its future growth.
In light of this launch, it suspects that analysts across the region may soon downgrade their margin expectations for the medium term.
Should you be concerned?
Whilst I think that Citi makes some valid points in this broker note, I feel that lower margins have already been built into its share price.
After all, this latest decline means that a2 Milk Company’s shares are now down by a massive 30% from their all-time high. This pull back has left them changing hands at approximately 26x estimated full year earnings.
Whilst its growth over the next few years may not be as explosive as it has been in recent years, I still feel this is an attractive level to pick up shares with a long-term view.
I would class its shares as a buy and choose them ahead of infant formul rivals Bellamy’s Australia Ltd (ASX: BAL) and Bubs Australia Ltd (ASX: BUB).
