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Biden-approved: Should you invest in baby formula maker Bubs Australia?
By Jessica Yun
It’s the Australian baby formula that’s won the approval of US President Joe Biden.
Last month, a single tweet from the American leader – whose administration was working around the clock for solutions to the US infant formula crisis – shot Bubs Australia (and its share price) to new highs and global recognition almost overnight.
US President Joe Biden has given his personal tick of approval of baby formula maker Bubs Australia.Credit: The Age
Soon, millions of American parents will become acquainted for the first time with the ASX-listed company that turns goats milk into infant formula, tins of which will soon be available on the shelves of 4000 supermarkets.
So, Bubs Australia has been making headlines lately – but does that make it a good investment?
How it started: Kristy Carr founded the brand in the kitchen of her home on Sydney’s northern beaches almost two decades ago, while on maternity leave from her communications job at a global firm. The mother of three was dismayed by the baby food on offer and began experimenting with making her own.
How it’s going: Bubs Australia is a $373.8 million Australian Securities Exchange-listed company and will supply at least 1.25 million tins of infant formula through two US retail partners, Kroger Co and Alberstons, which operates Safeway. It is a possibility that Biden may request more.
When the US deal was announced, Bubs’ shares rocketed more than 38 per cent, from 49¢ to 68¢. They are now changing hands for about 60¢.
Before the US news, the company was doubling down on China by striking a deal with Hong Kong milk trader Willis Trading, to strengthen its daigou (reseller) channel.
Industry: Consumer staples
Main products: Infant milk formula, toddler formula, infant food
Key figures: Chief executive Kristy Carr; chairman Dennis Lin
The bull case: Until now, the US infant formula market had been tightly held by three domestic players – Reckitt, Abbott’s and Nestlé. However, the infant formula crisis has blown the door wide open for global players to get a foothold in a market worth $US3 billion ($4 billion) annually – second only to China.
Bubs Australia was already becoming familiar with the US Food and Drug Administration (FDA) in direct discussions brokered by its advisory partner, Bondi Partners, co-founded by former federal treasurer and Ambassador to the US Joe Hockey.
The goat dairy product maker was the first to apply and be approved through a fast-tracked process – positioning itself as the first Australian company in the global race, and pipping its much larger rival, A2 Milk, in the process, which looks to be still awaiting approval.
“This may accelerate Bubs’ brand awareness in the USA,” wrote Wilsons Advisory analyst James Ferrier in a recent research note.
Ferrier, who has a “market weight” rating on Bubs’ stock, estimates the deal to be worth $20 million in sales.
“While the transaction itself is one-off, incremental brand awareness could accelerate the sustained sales trajectory for Bubs products in the USA,” he says.
Citi analyst Sam Teeger has a “buy” rating on Bubs’ stock and said the “US future [is] promising,” with Biden’s personal approval of the deal “helpful for the company’s marketing efforts” and in positioning the brand as a safe and reliable manufacturer.
He also added it was “somewhat perplexing” that Bubs has the first-mover advantage over A2 Milk.
The bear case: While analysts are largely unanimous that the deal means a foot in the door for Bubs and even potentially for A2 Milk, it’s not clear how long this will last.
Bell Potter’s Jonathan Snape acknowledged that the new agreement was a “good announcement” and estimated it could contribute $30 million in revenue, higher than Wilson Advisory’s estimation, but recently downgraded his stock rating from “buy” to “hold”.
He noted that “Operation Fly Formula” was a one-off and that the US FDA’s fast-track process would end in November this year. “In this light, we have treated this largely as a temporary boost, with additional toddler formula sales thereafter,” Snape wrote in a recent note.
Snape numbered a potential list of risks to investing in the formula maker, including COVID-triggered sharemarket volatility; Bubs’ potential need for “ongoing access to capital” to deliver on its strategy; supply chain disruptions that could impact Bubs’ ability to supply new or existing markets; regulation changes or the risk of not getting licenses or contracts approved or renewed; the capability and retention of senior executives for business growth; and other global rivals vying for a slice of the US market.
Bubs’ share price spike following the US deal’s announcement is also cause for caution, Snape believes. “In light of the recent share price gain, we downgrade our rating from Buy, Speculative Risk to Hold, Speculative Risk.”
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Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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