The stock of The a2 Milk Co (OTCPK:ACOPY, 30-year Financials) is believed to be possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $4.34 per share and the market cap of $3.2 billion, The a2 Milk Co stock is believed to be possible value trap. GF Value for The a2 Milk Co is shown in the chart below.
The reason we think that The a2 Milk Co stock might be a value trap is because
Link: These companies may deliever higher future returns at reduced risk.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. The a2 Milk Co has a cash-to-debt ratio of 44.34, which which ranks better than 88% of the companies in the industry of Consumer Packaged Goods. The overall financial strength of The a2 Milk Co is 9 out of 10, which indicates that the financial strength of The a2 Milk Co is strong. This is the debt and cash of The a2 Milk Co over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. The a2 Milk Co has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1.1 billion and earnings of $0.29 a share. Its operating margin is 28.54%, which ranks better than 96% of the companies in the industry of Consumer Packaged Goods. Overall, the profitability of The a2 Milk Co is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of The a2 Milk Co over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of The a2 Milk Co is 45.3%, which ranks better than 96% of the companies in the industry of Consumer Packaged Goods. The 3-year average EBITDA growth rate is 56.8%, which ranks better than 94% of the companies in the industry of Consumer Packaged Goods.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, The a2 Milk Co’s ROIC was 80.85, while its WACC came in at 3.32.
In short, the stock of The a2 Milk Co (OTCPK:ACOPY, 30-year Financials) gives every indication of being possible value trap. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 94% of the companies in the industry of Consumer Packaged Goods. To learn more about The a2 Milk Co stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
