Raise a Glass to the Decade’s Best-Performing Stock

(Bloomberg Opinion) -- It may have been the decade of smartphones, on-demand everything, and Instagram memes, but the prize for the world’s best-performing stock in the MSCI World Index goes to a dairy company in New Zealand.

How A2 Milk Co. managed to punch its way to a 16,150% return, in U.S. dollar terms, says a lot about global trends over the past 10 years. That growth now puts it at a market cap of $7.4 billion, a fraction of the $144 billion for Netflix Inc. (which returned 4,000%) but well ahead of comparably sized iconic department store chain Macy’s Inc.

Much global trade still revolves more around nations meeting basic needs, like feeding their growing populations, than the fruits of technology prowess. Witness the current U.S.-China trade spat and the fact that soybeans and pork are held as bargaining chips while the two sides inch toward an agreement.

Another undercurrent has been renewed focus on healthier diets. Demand for organic foods, vegetarian alternatives, and less starch (this was the decade of the keto diet) continues to climb. 

And then there’s China. The world’s largest country by population and second-largest by economy has a growing appetite not only for commodities, but nutritious, clean, and reliable food. With the tainted milk scandal of 2008 still fresh in minds, Chinese consumers have been eager to import dairy products from abroad, especially Australia and New Zealand.

A2 Milk isn’t the only one to tap into that demand. Fellow Kiwi Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, has done brisk business selling its products to China. Yet poor investments and shrinking margins pushed that company into a second year of losses.

The story at A2 Milk is a little different. In fact, it’s in the name. Cows’ milk has two types of beta-casein protein, A1 and A2. Many other forms of milk — such as from humans, goats and sheep — contain mostly A2 protein. Using a genetic test developed 20 years ago, the company says its product “is different from conventional cows’ milk because it comes from cows selected to naturally produce only the A2 protein type and no A1.”

Some claims about the benefits of A2-only milk haven’t stood up to scientific scrutiny, with marketers of the product fined and forced to walk back such assertions.

On its website, the company merely says that “many consumers and healthcare professionals report that certain people who experience challenges drinking conventional cows’ milk may experience benefits when they switch to A2 Milk.”

Yet the belief that A2 may be healthier or easier to drink, especially for Asian populations where lactose intolerance is higher, helped the company’s sales in China climb fivefold in two years, accounting for 31% of revenue. A2 Milk’s core markets of Australia and New Zealand were no slouches either, with revenue there jumping 92% over the same period. Infant formula, a product particularly popular in China, has been a major driver of top-line growth.

Helping its China expansion has been A2’s tapping of e-commerce channels, including an official store on Alibaba Group Holding Ltd.’s TMall site where it sells formula for newborns through to three-year-olds.

While investor enthusiasm for A2 was more sedate in 2019, up 35%, it’s starting to look expensive. With a price-earnings ratio of 38-times, it looks more like a tech stock (Alibaba trades at 32-times) than a food company. Its price-sales ratio of 8.4-times is more than double that of Vietnam Dairy Products JSC (3.7-times) and Fonterra (0.3-times).

Yet the bulls may be enticed by the company’s optimistic outlook, which includes a forecast for 84% China revenue growth in the fiscal first half ended Dec. 31. They seemed to be unfazed by the recent resignation of CEO Jayne Hrdlicka.

As we head into a new decade with the prospect of further trade tensions, evermore-powerful tech gadgets, and increasing deployment of artificial intelligence, there’s every chance the world will still be drinking milk.

To contact the editor responsible for this story: Patrick McDowell at pmcdowell10@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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