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Why the A2 Milk Company share price is tumbling lower today

James Mickleboro
Stock market chart or graph in red falling downward bear market.

The A2 Milk Company Ltd (ASX: A2M) share price has come under pressure on Tuesday. At the time of writing the infant formula and fresh milk company’s shares are down 2% to $11.85.

This latest decline means that its shares are now trading almost 32% lower than their 52-week high of $17.30.

Why is the a2 Milk Company share price trading lower today?

The catalyst for today’s decline appears to be a note out of Citi this morning.

That note reveals that Citi has retained its sell rating on its shares. This is despite the fact they have now drifted below its price target of $12.20.

According to the note, the broker continues to believe the market is expecting too much from a2 Milk. It feels that management’s focus on investing heavily in marketing to grow its sales will mean it falls short of consensus margin expectations.

Another negative is the increasing competition it is facing in China. Hot on the heels of Mead Johnson entering the a2-only infant formula market last month, a local producer has just done the same.

Chinese baby formula and yogurt maker Shijiazhuang Junlebao Dairy has launched its a2-protein only formula. This is the first time that a major domestic producer has entered this market.

Should you be concerned?

Given that management has dismissed concerns over increasing competition in the a2-only market previously, I wouldn’t be overly worried by this news.

In fact, last year the company advised that it believes it is “uniquely positioned to benefit from expansion of the category over time.”

This is due to a number of factors. It includes its strong brand which is based on contemporary values with unique channel-to-market strategies. And its enhanced consumer credibility as the creator and pioneer of the A1 protein free proposition.

The ongoing investment in R&D as the global leader and innovator of A1 protein free products is another factor. And a final key advantage is its ANZ milk supply.

Should you invest?

Overall, I think Citi makes some fair points, but I still feel a2 Milk Company can grow its earnings at an enviable rate in the coming years.

As a result, I think this recent share price weakness ought to be considered a buying opportunity for long-term focused investors. I would choose it ahead of Bubs Australia Ltd (ASX: BUB) and the soon to be acquired Bellamy’s Australia Ltd (ASX: BAL).

The post Why the A2 Milk Company share price is tumbling lower today appeared first on Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019