The Costa Group Holdings Ltd (ASX: CGC) share price was up 3.3% today. Over the past year the share price climbed around 81% to nearly $9 at 21 June 2018, but then dropped 16% to $7.57 at the start of the week.
I think it can be a dangerous game trying to “catch a falling knife” when a share price is falling. It can be quite frustrating if you buy and then the share price drops another 5%, 10% or even more in the subsequent weeks.
The horticultural company’s share price has gone up each day since Monday and today’s rise could signal that investors believe the share price represented good value.
I completely agree that Costa looks like good long-term value right now.
What Costa does
As a reminder, Costa is a food-growing company and has five fresh produce segments. It grows tomatoes, berries, citrus fruit, mushrooms and avocadoes.
Costa’s growth plans
When you look at any business you need to consider why that business will be worth more in time.
Costa’s current business is strong with it already supplying Australian supermarkets with produce. However, it is building up its avocado footprint through acquisitions so that it can now has a production season from February to December. This almost-year-round production is valuable to Costa and its supermarket clients.
In the berry segment it has just expanded its growing regions by 95 hectares.
For the mushroom segment it is spending $70.7 million on the most modern composting and growing facility, which will double the production per week at the location and also improve the quality of produce. It will also improve Costa’s cost position. This facility will reach maximum production by November 2019.
The company is expanding in China and Morocco. Expanding in multiple geographies could lead to Costa becoming a global food player over time.
There are a lot of avenues of growth for Costa.
The company’s efforts are being rewarded with a steady increase of profit each year. For FY18 the company is projecting net profit after tax (NPAT) (pre-SGARA and material items) growth of around 25%.
If the company continues to expand as it has done then I can see the profit growing by double digits for a number of years. Demand for quality Australian-grown food is expected to rise from multiple sources like Asia and an ageing population.
Costa is currently trading at 26x FY19’s estimated earnings with a current trailing grossed-up dividend yield of 2.2%. Although it’s not cheap, I think Costa looks like good long-term value for the growth it could achieve over the next five to ten years.
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Motley Fool contributor Tristan Harrison owns shares of COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.