Top broker thinks there’s still more upside in the A2 Milk share price

Below we take a look at why Macquarie Wealth Management still believes A2M's share price has room to run.

A2 Milk share price: positivity returns

Not a great time to be short.

The a2 Milk (ASX: A2M) share price finished yesterday’s session 11% higher after the company reported a solid growth outlook for the first-half of the fiscal year and revealed that it expected FY20 margins to be better than previously expected.

Here, the company elaborated that:

'Our progress thus far in the first half FY20 is very encouraging and, given that we are 6 weeks away from the close of this half we have confidence in providing a details first half outlook, which demonstrates progress being made in the early stages of our strategy execution.’

Additionally and speaking to the specifics of the company’s current focus, it was noted that:

'For this phase of our business, we consider the most important metrics to measure our success are a series of brand metrics in core markets - awareness, trial and loyalty conversion; share of category consumption; absolute revenue growth, and healthy underlying gross margins, by product category.’

Investors – who decisively fell out of love with the stock during the middle of this year – look to have grown infatuated again on such comments. Indeed, the A2 Milk share price has built on yesterday’s gains, rising another 2% today as investors scrambled to get back in on the market darling.

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The analyst outlook

Macquarie Wealth Management took yesterday’s positive outlook from A2M to reiterate their outperform rating and bump up their 12-month share price target from A$15.70 to A$16.20 on the milk stock.

At today’s price levels, that would equate to potential upside of around 18%.

Specifically, as a result of yesterday's AGM update as well as commentary on the first-half outlook, Macquarie made some slight adjustments to their expectations regarding A2's earnings outlook.

The investment bank now expects profits (NPAT) of NZ$354.4m in FY20, NZ$429.0m in FY21, and NZ$ 498.9m in FY22.

In addition to this, Macquarie sees potential new products and the company's official 1H FY20 results – expected to be released in February – as the two potentially bullish price catalysts for the stock, at this point.

Maybe more importantly, Macquarie believes that yesterday’s update regarding margins addresses many of the market's core concerns that saw the stock bid lower in recent times. Though brokers such as Citibank remain bearish on this front in the medium-term.

The investment bank also noted that historically, a2 Milk (ASX: A2M) tends to deliver stronger revenue growth in the second half of the fiscal year than it does the first half – typically in the +12-15% range.

On such assumptions, Macquarie notes A2M could be looking at full-year revenues of NZ$1,680m.

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