The Bubs Australia Ltd (ASX: BUB) share price has run out of steam on Tuesday morning.
At the time of writing, the infant formula company's shares are down 5% to 64.5 cents.
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Why is the Bubs share price sinking today?
There appear to be a couple of catalysts for the weakness in the Bubs share price on Tuesday.
The first is profit taking after a stellar gain on Monday following news that the company has struck a deal with the Biden Administration to supply 1.25 million tins of infant formula to help with shortages in the United States.
The market's reaction was so positive that the Bubs share price remains up 33% this week despite today's decline.
What else is weighing on its shares?
Also potentially weighing on the Bubs share price is a broker note out of Bell Potter this morning.
According to the note, the broker has downgraded the company's shares to a (speculative) hold rating with an improved price target of 75 cents.
Bell Potter was pleased with the aforementioned news but highlights that the US FDA's infant formula enforcement discretion policy (IFEDP) is only in place effect until November. As such, it is treating this development largely as a temporary sales boost. It said:
The IFEDP is only in effect until Nov'22 and in this light we have treated this largely as a temporary sales boost, with additional toddler formula sales thereafter.
Though, the broker does acknowledge that the announcement should boost brand awareness in the US, which is a market it believes could be very lucrative for Bubs. It explained:
At the very least the announcement de-risks near term sales forecasts for BUB, which are premised on execution against the Alpha Group equity linked distribution deal announced earlier in the year.
It could also be a viewed as a positive signal for BUB's achieving future USFDA approval for its infant products and enhanced brand awareness for its existing toddler products which are already distributed in the US. The upside potential in the US is high, particularly the organic grass fed IMF product, where we have estimated in the past a 2.0-4.5m pa tin opportunity for similar products.
However, due to the strong rise in the Bubs share price, the broker doesn't believe the risk/reward on offer is enough to maintain a buy rating.
It concludes:
This is a good announcement for BUB and at the least will likely result in increased US brand awareness while benefiting near term cashflows. BUB remains a high ceiling growth play in the IMF, however, in light of the recent share price gain we downgrade our rating from Buy, Speculative risk to Hold, Speculative risk.
