a2 Milk Increases Sales Guidance…Again

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.


Härje Ronngard,

Junior Analyst, Money Morning

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Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.

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