The a2 Milk Company Ltd [ASX:A2M] climbed up 9.1% to a high of $3.65 this morning.
What caused a2 Milk’s Share Price to rise?
a2 Milk announced that sales could be NZ$20 million (AU$18.99 million) higher than their previous guidance. The company explained:
‘Based on a review of its unaudited financial results to 31 May 2017, and production deliveries of a2 Platinum infant formula being achieved in June consistent with the revised production schedule, the Company has determined it appropriate to further revise its full year outlook upwards.’
Full year 2017 revenues are now expected to be approximately NZ$545 million (AU$517 million).
What now for a2 Milk?
With their current profit margin of 15.38%, a2 Milk could generate as much as $79.53 million in net profit. It would give the company an earnings per share of 10.9 cents.
That a 161% increase in net profit and a 161% increase in earnings per share. It’s easy to see why a2 Milk is trading around 33.3-times its expected FY17 earnings.
But before you jump into the stock, I’d suggest you be cautious. a2 Milk’s growth cannot continue forever. You simply don’t know when growth will start to recede or if their profit margin will be hurt by more competition.
And because these are unpredictable factors, it will almost be a guess on your part (and everyone else’s) to predict what will happen to a2 Milk in the coming years.
Bellamy’s is a good example of a growth company cut short unexpectedly. The company had supply chain problems due to a changeover in Chinese regulation. The company has gone from profits of $38.3 million in FY16 to now expecting a loss for FY17.
I’m not saying the same thing will happen to a2 Milk. But you need to have a well thought-out reason why you believe a2 Milk will continue to growth rapidly in the future, before you invest.
Junior Analyst, Money Morning
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