I think there’s a chance that A2 Milk Company Ltd (ASX: A2M) shares could be the best pick in the ASX 200 today.
Why I think A2 Milk is a good buy today
A2 Milk is a really good business. It has lots of factors that can make strong long term returns.
There is a good international growth aspect to A2 Milk. It’s expanding in many places like China, the rest of Asia and North America. Some of the best-performing ASX shares have grown outside of Australia like Xero Limited (ASX: XRO), Altium Limited (ASX: ALU) and CSL Limited (ASX: CSL).
A2 Milk has a very strong balance sheet with hundreds of millions of dollars of cash, with no debt. That puts it in a very strong position. That cash pile would only be called upon (for day to day operations) if A2 Milk’s operating cashflow went negative. A relatively small reduction of profit still means it’s generating positive profit and cashflow.
It still has a long term growth runway in my opinion. It’s getting close to $100 million of annual sales in the US, but that’s only a small part of the long term American opportunity. There are many countries, like Canada, where A2 Milk can build a material market share position in the coming years.
At the time of writing the A2 Milk share price has dropped by around a third since 30 July 2020. According to CommSec, that means it’s valued at under 22 times the estimated earnings for the 2023 financial year.
Better than other ASX 200 shares
A2 Milk is certainly not the only great business in the ASX 200. The question is whether it’s the best one to buy.
Altium is a great business. Brickworks Limited (ASX: BKW) is a great business. CSL is a great business. Magellan Financial Group Ltd (ASX: MFG) is a great business.
In previous years, A2 Milk was generating the same sort of profit growth that the tech shares were. But now the ASX 200 tech shares are trading on big valuations – but A2 Milk isn’t because of the (seemingly) short term problems relating to COVID-19 and the daigou channel.
I think A2 Milk has much more long term growth potential (with consistent demand) than resource businesses and financial businesses. Its valuation makes much more sense than tech shares. The main question is how long will the COVID-19 impacts last? It’s hard to say at this point, but it could be quicker than the market is currently pricing for A2 Milk. And A2 Milk is doing its best to grow its local China business.
A2 Milk is one of the best ASX growth shares in my opinion. There may be a bit more volatility ahead, but looking out three years I think it could be a really good ASX 200 business to buy.
