A2 Milk share price: interim results preview

A2 Milk share price: the last six months reviewed

a2 Milk (ASX: A2M) saw its share price open some 2% lower today. The broader market also took a hit in the first thirty minutes of trade, dropping ~120 points, or 1.7%.

A little before noon the stock had drifted even lower, down 2.88% – to $15.13 per share.

Yet amongst this volatility, it was revealed that J.P. Morgan today upgraded their share price target on the IMF stock, raising their price target on a2 Milk 13% to $13.90 per share.

Overall, the stock has performed well since bottoming-out in late-November – rising ~35% in that period.

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Surprisingly bullish indicators and shifting views

Looking at the driving forces behind this recent run-up: As we wrote last week, Citi analysts recently upgraded their rating on the stock to Buy, and posited that the Coronavirus pandemic may actually help push A2M’s second-half margins higher.

This is because ‘household stockpiling could result in stronger than expected sales and consumers increasingly staying at home may reduce the need for 2H20 trade and outdoor marketing activities,’ and ‘travel restrictions could help the company reduce its travel expenses,’ says the broker.

Mind you, the market looked to be growing more optimistic on A2 Milk – after a protracted period of pessimism – before the emergence of the Coronavirus. The main catalyst for this sentiment shift was a strategic re-focus, driven by a C-suite shake-up.

Back-tracking somewhat: it was in the wake of the company's FY19 results, that investor pessimism emerged in its most pronounced form.

Here, we wrote that:

‘a2 Milk’s earnings (EBITDA) came in 2.7% below the average analyst consensus, according to Bloomberg Data.’

Besides missing analyst earnings expectations, the second problem was a strategic one: the company’s previous CEO – Jayne Hrdlicka – was pursuing an aggressive expansion strategy – noting that the company expected to spend 12% of revenues on marketing in FY20, as part of the company's FY19 results.

That aggressive strategy didn’t sit well with investors or analysts: between August to November last year the stock crashed about 30%. Long story short, at A2’s 2019 AGM, the aggressive marketing plan was moderated, and not long after, Hrdlicka was ousted from the company, replaced by A2M’s previous CEO, Geoffrey Babidge, who is now serving as Interim CEO.

Though A2M would continue to expand, Mr Babidge reiterated that a greater focus would be placed on maintaining margins.

In a recent investor briefing it was flagged that:

'For 1H20, we anticipate revenue in the range of $780 million to $800 million with growth demonstrating strong performance against strategy. EBITDA margin % in 1H20 is expected to be in the range of 31-32%.'

Now, with A2M’s half year results due in just four days, on 27 February, investors and analysts will likely be keen to see if the company can hit those revised guidance figures.

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