Despite announcing a 127% increase in revenue to $353 million and swinging from a $2 million loss to a $30 million profit, the shares of A2 Milk Company Ltd (Australia) (ASX: A2M) were crushed during earnings season.
At the start of this week its shares were still down by around 17% since the release of its full year report on August 24. But could this be about to change? Judging by the rampant buying in its shares today it looks like it could.
So far today the growing dairy and infant formula company's share price has surged higher by almost 5% to $1.98, despite there being no notable news released recently.
In my opinion it would appear as though sentiment is shifting positively on the company, with a couple of notable buyers attesting to this.
Leading Australian investment company Challenger Ltd (ASX: CGF) has just increased its holding in A2 Milk Company from 7.23% to 8.25%. Furthermore, leading New Zealand-based investment management company Harbour Asset Management increased its holding to just over 5%.
It's not too surprising to learn this in my view. Although its shares are trading at a whopping 47x full year earnings, this multiple reduces to just 24x forecast FY 2017 earnings according to CommSec. I believe this puts them at a reasonably fair price for those that are prepared to be patient.
Although the company's premium milk product is a quality product, the big draw to the company for me has to be A2 Milk's infant formula. As far as I am concerned this will be the biggest growth driver moving forward and thankfully things are looking very positive.
A new supply agreement with Synlait Milk looks to be a big positive and enhances its supply chain which was a little wobbly in the first half resulting in stock shortages. This bodes well for the company considering the growing demand for its products from mainland China.
Fears over regulatory changes in China have plagued the company for some time now, as with Bellamy's Australia Ltd (ASX: BAL) and Blackmores Limited (ASX: BKL). However, A2 Milk Company's management has eased these by stating that it believes the company is well placed to meet any changes to regulations in China.
So all in all, it looks to be onwards and upwards for this growing company in my view and I would consider it a strong buy at the current price.
