A2 Milk Co Ltd (ASX: A2M) shares are joining in with the broader market rally today.
The S&P/ASX 200 Index (ASX: XJO) dairy stock closed yesterday trading for $4.93. At the time of writing, A2 Milk shares are changing hands for $4.99 apiece, up 1.22%.
The ASX 200 is up 1% at this same time.
As you can see in the chart above, despite today’s welcome boost, A2 Milk remains down a painful 26% since the opening bell on 3 January.
With that in mind, we look at the pros and cons of buying the dairy stock right now.
What’s happening with the ASX 200 dairy stock?
Like Australia’s other leading dairy stocks, A2 Milk shares have come under pressure amid a big decline in the Chinese daigou market in the wake of the global pandemic.
If you’re not familiar with the term, daigou is the market that sees customers buying products, like infant formula, in Australia to send back to China.
With infant formula providing a large slice of A2 Milk’s revenue, increased Chinese government regulation in this market and a sliding birthrate in China are also throwing up headwinds.
Ophir Asset Management director Andrew Mitchell revealed the fund sold its A2 Milk shares nine months ago.
Which isn’t to say he doesn’t see some strong potential in the company.
“There is no doubt that A2 is a much better run business than it was a few years ago,” Mitchell said (quoted by The Australian).
However, Mitchell added:
We are concerned about the short-term outlook for the business given a decline in birthrates and Chinese mums becoming increasingly price sensitive with infant formula. In the interim we are anticipating increased competition due to excess inventory following the transition to new Chinese labelling requirements.
Well, that would certainly count as a con to buying A2 Milk shares right now.
But with shares down 26% in 2023, could today still represent a good buying opportunity for long-term investors?
According to Mitchell:
While we don’t own A2, we are positive on the stock because in a medium term they are in a strong position to continue to take market share and capitalise on any rebound in the Chinese birthrate.
How have A2 Milk shares been tracking longer-term?
While well down in 2023, A2 Milk shares are up 11% since this time last year.
