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The latest earnings announcement The a2 Milk Company Limited (NZSE:ATM) released in June 2018 confirmed that the company benefited from a significant tailwind, more than doubling its earnings from the prior year. Below is a brief commentary on my key takeaways on how market analysts view a2 Milk’s earnings growth trajectory over the next couple of years and whether the future looks even brighter than the past. I will be looking at earnings excluding extraordinary items to exclude one-off activities to get a better understanding of the underlying drivers of earnings.
Analysts’ expectations for the upcoming year seems buoyant, with earnings climbing by a robust 37%. This growth seems to continue into the following year with rates reaching double digit 75% compared to today’s earnings, and finally hitting NZ$414m by 2022.
Although it’s useful to be aware of the rate of growth each year relative to today’s value, it may be more insightful to gauge the rate at which the company is rising or falling on average every year. The pro of this approach is that it removes the impact of near term flucuations and accounts for the overarching direction of a2 Milk’s earnings trajectory over time, which may be more relevant for long term investors. To calculate this rate, I put a line of best fit through the forecasted earnings by market analysts. The slope of this line is the rate of earnings growth, which in this case is 19%. This means, we can assume a2 Milk will grow its earnings by 19% every year for the next couple of years.
For a2 Milk, I’ve compiled three fundamental factors you should further research:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is ATM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ATM is currently mispriced by the market.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of ATM? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.