Strong investor confidence pushed the A2 Milk Company Ltd (ASX: A2M) share price upwards as high as $16 before its reporting date, yet the company disappointingly missed analyst expectations. Since 20 August, a2 Milk's share price has tumbled 10% to be trading for $14.42 at the time of writing.
a2 Milk's FY19 results
Objectively speaking, these were fantastic results for a growth company that has been operating for several years already. EBITDA was up 46.1% and net profit after tax grew by 47% to NZ$287.7 million. a2 Milk also managed to bolster its cash position by an impressive 61% to NZ$464.8 million over the last 6 months. These stellar results were a result of strong market penetration in its product segments. Infant nutrition rose to 6.4% of market share in China while Australian fresh milk captured 11.2% of the market.
So, what went wrong?
The company didn't meet market expectations. The market consensus for net profit expectations was around NZ$296.2 million, around NZ$9 million higher than reported figures. Also, its announcement of upping investment into a growing marketing budget didn't please investors. This is because it would be at the expense of a2 Milk's impressive profit margin of over 30%.
Further to this, the infant formula company announced it would no longer operate in the United Kingdom (UK). Exiting its liquid milk operations in the UK indicates that a2 Milk was unsuccessful in capturing market share, which was a further note of disappointment for investors. However, this is not to say that the company has rejected any future plans of pursuing the European market.
Foolish takeaway
Despite these slight hiccups, a2 Milk's stock price is back on the rise, up 1.69% today alone at time of writing. This puts its price-to-earnings (P/E) ratio at a whopping 80x multiple, reflecting continued and strong investor sentiments.
Similarly, since the Reserve Bank of New Zealand dropped its interest rate last month by 50 basis points to 1%, NZ export companies have benefited from lower input costs and an increase in revenue denominated in other currencies.
Overall, despite missing profit targets by a fraction, a2 Milk managed to boost its revenue by a 41.1% and EBITDA by 46.1%. The company is still set for success, with its profit margin improving from 30.7% to 31.7%. With intentions to up investment in marketing and organisational capability, this should see a2 Milk's growth continue at its rapid pace.
