A week ago, The a2 Milk Company Limited (NZSE:ATM) came out with a strong set of half-year numbers that could potentially lead to a re-rate of the stock. Results were good overall, with revenues beating analyst predictions by 2.0% to hit NZ$806m. Statutory earnings per share (EPS) came in at NZ$0.25, some 9.2% above what analysts had expected. Analysts typically update their forecasts at each earnings report, and we can judge from their estimates whether their view of the company has changed or if there are any new concerns to be aware of. We thought readers would find it interesting to see analysts' latest (statutory) post-earnings forecasts for next year.
After the latest results, the 14 analysts covering a2 Milk are now predicting revenues of NZ$1.70b in 2020. If met, this would reflect a decent 13% improvement in sales compared to the last 12 months. Statutory earnings per share are expected to grow 13% to NZ$0.49. Before this earnings report, analysts had been forecasting revenues of NZ$1.66b and earnings per share (EPS) of NZ$0.46 in 2020. So there seems to have been a moderate uplift in analyst sentiment following the latest results, given the upgrades to both revenue and earnings per share forecasts for next year.
With these upgrades, we're not surprised to see that analysts have lifted their price target 9.2% to NZ$16.80 per share. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. Currently, the most bullish analyst values a2 Milk at NZ$20.00 per share, while the most bearish prices it at NZ$11.50. This shows there is still quite a bit of diversity in estimates, but analysts don't appear to be totally split on the stock as though it might be a success or failure situation.
Zooming out to look at the bigger picture now, one of the ways we can make sense of these forecasts is to see how they measure up both against past performance, and against industry growth estimates. We would highlight that a2 Milk's revenue growth is expected to slow, with forecast 13% increase next year well below the historical 42%p.a. growth over the last five years. Juxtapose this against the other companies in the market with analyst coverage, which are forecast to grow their revenues (in aggregate) 13% next year. Factoring in the forecast slowdown in growth, it looks like analysts are expecting a2 Milk to grow at about the same rate as the wider market.
The Bottom Line
The most important thing to take away from this is that analysts upgraded their earnings per share estimates, suggesting that there has been a clear increase in optimism towards a2 Milk following these results. There was also an upgrade to revenue estimates, although as we saw earlier, forecast growth is only expected to be about the same as the wider market. Analysts also upgraded their price target, suggesting that analysts believe the intrinsic value of the business is likely to improve over time.
With that said, the long-term trajectory of the company's earnings is a lot more important than next year. We have estimates - from multiple a2 Milk analysts - going out to 2024, and you can see them free on our platform here.
We also provide an overview of the a2 Milk Board and CEO remuneration and length of tenure at the company, and whether insiders have been buying the stock, here.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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