A2 Milk Company Ltd (ASX: A2M) shares started the week with a heavy decline.
On Monday, the infant formula company's shares crashed 10% to $6.55 after announcing a product recall in the United States.
This latest decline means that its shares are now down almost 30% since the start of the year.
Let's see if Bell Potter thinks this has created a buying opportunity for investors.
What is the broker saying?
Bell Potter suspects that contaminated ARA could be behind the product recall. It said:
A2M has initiated a voluntary recall of three batches of IMF products sold in the USA due to the presence of cereulide, with the probable source from an ingredient in the IMF supply chain. The ingredient hasn't been named but we note contaminated ARA has been the product causing similar cereulide contamination recalls globally from competitor products and as such we suspect this is the likely culprit. The recall covers a small amount of volume and hence is not expected to have an impact on FY26e outcomes.
However, the broker does see risks that the news could impact its brand in the lucrative China market. It adds:
There is the risk that A2 as a brand in China could be associated with a contaminated product and that can have an impact on the perception of the brand in China, even if the recall is outside China and the recall volume is small. A formal announcement by GACC has been released, stating that the recalled product was only sold in the USA, which likely further brings attention to the event.
Bell Potter suspects that this could lead to a higher marketing investment to recapture lost customers. The broker said:
We note our forecasts were below consensus in FY27e, as we had expected the issues in 4Q26e COGS would drag into 1Q27e and had seen the potential for marketing investment to be front ended as A2M would need to recapture lost customers. There is the potential that brand investment will need to be lifted as A2M seeks to reassure Chinese customers over product safety.
Should you buy A2 Milk shares after the dip?
According to the note, Bell Potter has retained its hold rating on A2 Milk shares with a reduced price target of $6.75 (from $8.35). This compares to its current share price of $6.55.
Commenting on its recommendation, the broker said:
Our Hold rating is unchanged. Product recalls, even outside of China have the scope to impact brand perception. The timing of the recall is also less than ideal as A2M is already short product on ground in China and hence already needed to potentially invest to recapture customers that had switched to alternative suppliers.
The post Are A2 Milk shares a buy after the 10% selloff on Monday? appeared first on The Motley Fool Australia.
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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