Why Did The a2 Milk Company Shoot up 6% Today?

The a2 Milk Company Ltd [ASX:A2M] rose as much as 6.76% this morning to a high of $3.16 per share.

The stock is now up more than 50% year-to-date.

What happened to the a2 Milk share price?

This morning, a2 Milk said demand for a2 Platinum infant formula has exceeded their expectations.

Demand has been particularly strong in Australia, but also through the cross border e-commerce channel into China. The company confirms that for the 9 months ended 31 March 2017, Group revenue was NZ$388.5 million.

The company is also planning to ramp up supply through its suppler, Synlait Milk. Based on strong demand in the second half of FY17, a2 Milk expects second half sales to total NZ$525 million (around AU$486 million).

But it’s not just positive words from the company that’s encouraging investors to bid up the stock. According to the Australian:

A recent report by Goldman Sachs claimed that despite the strong performance of the a2 share price, there was still further upside to its 12-month price target for the stock of $3.30. It also raised its earnings-per-share forecasts for 2017-19 for A2 by 9-12 per cent.

What now for A2M shares?

Is it too late to buy a2 Milk?

If you look at the company’s revenue and earnings before interest and tax (EBIT) figures, they’re a fast growing company in its early stages. From 2015, revenues have increased 339.56%, currently sitting around AU$440 million according to Bloomberg.

EBIT has followed a steeper trajectory, running up from AU$400,000 to AU$92 million. The company also has a return on equity of 42%, which means management can very efficiently turn shareholders’ money into profits.

The question is, do you believe demand will continue for the foreseeable future? And can a2 Milk out-compete potential new competitors entering the market? If yes, then a2 Milk’s long-term growth might just be getting started.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

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