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Costa Group share price crashes 40% lower on surprise profit warning

It has not been a great start to the day for the Costa Group Holdings Ltd (ASX: CGC) share price.

In early trade the horticulture company’s shares are down 40% to $4.40 after a surprise profit warning.

What did Costa announce?

At the end of November at Costa’s annual general meeting, management provided its earnings guidance for the 2018 calendar year.

Due to numerous factors including additional investment costs and a lighter citrus crop, which reflected the natural biennial bearing cycle, earnings were expected to be lower than the prior corresponding period.

Investors were willing to overlook this because management expected its investments to result in earnings growth in the low double digits for the 12 months to June 2019 and approximately 30% for the 2019 calendar year.

However, this morning the company revealed that things aren’t quite going to plan.

It advised that it experienced subdued demand in a number of categories including tomato, berry, and avocado during the month of December and warned that trading conditions in January have been slower than expected. This subdued demand has led to reduced pricing for a number of product lines.

As a result, its 2018 calendar year earnings are expected to be lower than previously thought.

Furthermore, if current trading conditions persist, NPAT-S for the 12-month period ending June 2019 is expected to be flat on the prior corresponding period, compared to previous forecast of low double digit growth for the period.

What now?

Management does not believe that the immediate issues are structural and expects things to pick up and allow the company to deliver 2019 calendar year earnings in line with its previous guidance.

In addition, it advised that ongoing growth plans across the categories continue to track well.

Should you buy the dip?

I’m a big fan of Costa, but this trading update is very worrying.

And while I still think it could be a great long-term investment, if things don’t pick up and it fails to deliver on its calendar year 2019 guidance then I suspect its shares could be de-rated significantly.

After all, very few shares have the privilege of trading at such a premium when they are delivering zero growth.

In light of this, if you don’t already own shares you might be best holding out to see how the company is tracking in a few months.

Until then I would suggest investors check out food shares such as A2 Milk Company Ltd (ASX: A2M) or Collins Foods Ltd (ASX: CKF).

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Motley Fool contributor James Mickleboro owns shares of Collins Foods Limited. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Collins Foods Limited. 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.

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