The Costa Group Holdings Ltd (ASX: CGC) share price is up over 88.4% since it listed on the ASX in July 2015. There are a number of reasons why its shares have done so well, I will outline three of them in this article.
Costa Group is a fresh food producer with operations in Australia, North Africa and China. It now has a market capitalisation of $1.3 billion and here are three reasons why I think it will keep growing larger:
Diverse operations
Costa has a diverse revenue base, it grows mushrooms, berries, citrus, tomatoes and avocados. There is strength in diversity because it mitigates risk if any one food type suffers growing problems or price problems.
This approach allowed Costa to grow revenue by 9% and net profit after tax (before fair value movements of biological assets) by 35.7%.
Health food boom
Australians and citizens from other countries are increasing their intake of healthy food. This is great news for Costa because that's exactly what Costa is delivering.
According to the Nielsen Homescan (by value) at 31 December 2016 the growth of the mushrooms category was 3.2%, the blueberry category saw 34% growth and the raspberry category grew by 35%.
There is growing demand for quality Australian produce in other countries, particularly China, which will hopefully see Costa increase sales and profits strongly over the coming years.
Fairly consistent demand
There will always be a certain amount of demand for food produce whether the economy is in a boom or a bust. This can give Costa and shareholders some assurance that it can produce solid returns no matter the economic environment.
Knowing this allows management to make investment decisions for new or upgraded farms with confidence knowing the sites will always have demand.
Risks
Costa will need to monitor any changing climate conditions that could affect the growing conditions. By growing on three different continents this does somewhat mitigate the risk of this unless global conditions were to change.
Wesfarmers Ltd's (ASX: WES) Coles, Woolworths Limited (ASX: WOW) and Aldi are always on the lookout to reduce their costs so Costa management will need to be strong in any future negotiations.
Foolish takeaway
Costa is currently trading at 40x FY17's estimated earnings with a grossed-up dividend yield of 3.51%. This is quite expensive compared to the market's price/earnings ratio of 16.5, but Costa could keep growing strongly so this price could be justified. If you'd prefer a stock that's going global as an alternative to Costa with a bigger dividend yield, you should look at our number one dividend stock for 2017.
