The are many good reasons why I decided to invest in Costa Group Holdings Ltd (ASX: CGC), but I'll cover three in this article.
Costa is Australia's largest horticultural business. Many of the fresh food items that you buy from the supermarket may have been grown by Costa if you shop at Aldi, Coles Group Limited (ASX: COL) and Woolworths Group Ltd (ASX: WOW).
Its share price has risen by nearly 200% over the past three years. Here are three reasons why I think the share price could keep going up:
Multiple growth avenues
Simply being a food company isn't enough to justify an investment, to beat the market any business has to display growth qualities.
Costa is using several methods to grow its business. It is expanding its plantations at its existing farms and also investing in productivity improvements to get more out of the land it currently has.
The food company is also making bolt-on acquisitions near its existing hubs which gets more out of its production and packing hubs. The small acquisitions themselves add to earnings.
Finally, Costa can make major acquisitions which materially benefit the business. For example, Costa decided to increase its ownership to 90% of African Blue.
Price inflation is likely
The price of food is affected mostly by supply and demand issues. Food prices are likely to increase over time, but fresh healthy food prices could rise even faster.
Australian diets are, in general, improving over time. It's perhaps a sign that society complains about eating too much avocado on toast, not too many Big Macs – younger people are eating healthier!
Asians see Australian produce as quality with high standards throughout the production. The growing Asian middle class could increase demand for Costa's products, leading to prices increases like we've seen with other consumer products such as baby formula.
Possible additional produce categories
The current Costa business has five food pillars: Tomatoes, mushrooms, berries, citrus fruit and avocados.
Costa has good growth prospects and is predicting that underlying profit can grow by low double digits for the next five years.
It recently added the avocado division which diversified its earnings further. There are plenty of fresh food categories that Costa doesn't currently sell, so there's a good chance it will improve its offering to its supermarket clients even more in the coming years.
Foolish takeaway
Costa is currently trading at 27x FY19's estimated earnings with a grossed-up dividend yield of 2.6%. It's not trading as cheaply as it was a few weeks ago but I think it could still beat the market over the next five years at the current price.
