Originally Posted by
Snoopy
Jeremy, a company can choose its equity structure (the balance between equity and debt) and choose what markets it operates in. The equity structure is what the operational business is built on. The operational business in the case of A2 milk consists of both fresh milk and value added product, of which infant formula is the headline high value add item.
You could 'adjust for cash' if the company had committed you to paying out the cash as a special dividend. But A2 has not done that. AFAIK A2 milk plan to use the cash to develop their markets and supply chain. So if you 'adjust for cash' you are also taking out the future business development that the cash is ear-marked to fund. You may think the company can run on less cash. But the company has chosen to retain a significant cash balance for reasons that you or I may not fully appreciate, and we have to accept that this is how management has chosen to run the business. Put this way and in this circumstance, I hope you can see that 'adjusting for cash' in these circumstances is not an acceptable valuation technique, because the company will be unable to execute their growth strategy if you do this.
Now on the subject of geographic market losses. A2 has pulled out of the U.K. So it would be legitimate and desirable when making an earnings comparison with a previously comparable period and constructing an historical earnings profile to remove any UK market losses from the company earnings history. However, in the USA as I understand it A2 are doubling down on their investment and pushing hard to getting critical mass and earnings momentum. There is the cost of establishing in new markets. All successful growth companies will make a loss when first establishing in a new market. Losses in the establishment phase cannot be avoided. I put it to you that by excluding US market losses in your valuation you are modelling the A2 business in a way that is not real. Doing that will likely lead to poor investment decisions, and relatively poor outcomes for you as a shareholder. If the US was a zombie market that A2 were in the process of withdrawing from then your approach would be fine. But the truth is quite the opposite. The US is still down as a major growth engine for A2 into the future.
SNOOPY