After listening to a case study on Monster energy I was motivated to run my eyes back over A2Milk. They have a similar business strategy as mainly a marketer of their product, staying mostly clear of farming and manufacturing and perhaps they have a similar potential to become a 100 bagger over the long term. I invested at 1.75 and sold at 15.2 in February last year due to fears over the risks to further sales growth Vs their valuation. There was also the consideration that lots of high quality businesses were selling at a large discount at this time whereas A2M was comparatively shooting the lights out
My fears were a) increase in demand being experienced at the time for baby formula would be followed by a drop in demand (since realised) and b) their expansion efforts in North America is unlikely to be successful.
I had been living in North America (all around the West coast & BC) for the last 18 months and discovered that finding A2Milk on supermarket shelves was very difficult. In NA they have A LOT of different milk products making up a lot of total shelf space and A2Milk always had a spot the size of one milk carton that was hard to find and full to the back with A2Milk. Wooshaa recently posted on hotcopper a photo of 3.5L A2Milk selling for $1.97 at Costco, if they have resorted to this level of discounting to move milk then it seems at least some part of the NA expansion strategy has failed.
The third thing which I didn't foresee and probably creates the biggest risk is the temporary loss of daigou resellers due to a lack of Chinese students and tourists in Aus. I had thought up until now that they were simply arbitraging formula between Aus and China but it seems they are impacting sales at a level which suggests they are actually also an important marketing asset for A2M in China.
So we have a potentially failing NA expansion (Jury not quite out yet but I have suspicions), pantry de-stocking creating pause in top line growth and inventory stocking level risk (potential write-downs?), temporary elimination of daigou hurting sales in Aus and marketing in China and we have a share price almost 50% down from its 52 week high. The silver lining is that they are reportedly maintaining their brand reputation and awareness in China.
I see an opportunity brewing here, but no rush to re-enter considering they are forecasting a drop in revenue year on year and I would like to see Chinese tourists and students returning to Aus before reinvesting as who knows how long this will take. The situation could get worse before it gets better. The bottom line though is that they are still a high quality company, maintaining their brand reputation, now trading at a reasonable PE of 25. When I can see a clear path to typical A2M style growth returning I'll be interested to run a valuation and see where it stands
Guidance downgraded today resulting in 24% drop in share price. Impact on sales and distribution from COVID has been worse then anticipated especially in the baby nutrition component of the business which had been performing strongly. Interestingly Chinese loyalty to the brand still appears to be strong and other products are performing well in Aus and US.
Current feelings are a possible market over reaction for an otherwise good business. Has been a great company but experiencing strong headwinds in the past 12 months. I think it has the moat and loyalty to survive in the long run but would need to be held for longer now possibly to let the thesis play out. Unlikely needing to rush in too soon.
Not sure if I'm over looking anything?
Although A2M has a strong brand, I'm quite bearish on the outlook for the company for the short term. Reasons are the recent insider selling and the clumsy release of updated numbers on the impact of the Victorian lockdown for the Daugou channel. Unless I missed something, I think the Victorian lockdown impact should have been better highlighted in the FY presentation. My position got stopped out but I may revisit if it falls below $14 again.
I'm surprised by the lack of negativity towards management following their outlook update on the 28th Sept. 3 weeks earlier their investor presentation had been very positive with little indication of this down grade. Reports for insider selling also leaves a sour taste. What am I missing? Why do I feel miss lead and ripped off? Management trustworthy?
Matt Joass from Maven Funds Management: a2 Milk: The Story of the 2,200% Monster Next Door
"This is the story of how a little company from New Zealand grew to become a 14 billion dollar giant, the signs that indicated a big future ahead, and the tale of one of the greatest blunders in Australian business history. It is also the story of how we can apply the principles of what I call monster hunting to our own investing, and use the lessons on our quest to find the next potential winner while it is still small and undiscovered."
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