3 reasons why the Costa share price could beat the ASX200 this year

I think there a few reasons why Costa Group Holdings Ltd (ASX: CGC) could beat the S&P/ASX 200 Index this year.

Costa is Australia’s largest horticultural company that grows avocados, berries, mushrooms, citrus fruit and tomatoes.

The Costa share price is down nearly 28% in 2019 so far, so my prediction is that from today it will beat the ASX 200 for the rest of the year.

It was a rough start to the year when the fresh food company admitted it had experienced subdued demand in a number of its categories, namely tomato, berry and avocado during December 2018. Costa said that patchy demand had led to reduced pricing and the citrus off season also finished earlier than expected.

All of the above led to NPAT-S guidance for the 12 months to June 2019 being flat, compared to the previous prediction of low double digit growth. But, here are my three reasons why Costa could actually outperform this year:

Large profit growth predicted for 2019

At the release of the December 2018 result, Costa said that the outlook for the market, the crop performance and weather conditions led the company to expect underlying net profit for the 2019 calendar year to be “at least 30%”. That would be some turnaround.

The market may be quite sceptical that Costa is going to achieve that considering Costa has already disappointed the market by not achieving a prior prediction. If Costa reports well in August and things look on track for 2019, then that could be a good catalyst for the share price.

Recovery of food prices

There has been a recovery of food prices since the horror December. Costa Debney CEO said “The pleasing thing is we’ve had very strong recovery in all categories. Avocados are still a touch lower than we’d like, but certainly now the tomatoes have really gone very strongly, all the others recovered about three or four weeks ago. Berries and the other crops, bananas, grapes.”

Indeed, I can personally attest to that. My local supermarket has seen the price of tomatoes double in recent weeks. Costa will try to improve the quantity and quality of its produce, but it’s the price it gets for the food which can largely dictate profit growth year to year.

International growth

Costa’s domestic business is high quality and worth owning the shares for, but it’s the international growth that could make it a market beater.

The growth that Costa is achieving in China and Morocco could turn the business into a truly global food business, which is very useful for the overall thesis considering the rising international demand for fresh quality food, particularly from Asia consumers.

Foolish takeaway

There are risks to Costa of course, food prices could fall further and damaging weather could hurt harvests.

Costa is trading at 21x FY19’s estimated earnings, which I think is a very reasonable price for this business which has a lot of growth potential, particularly if it keeps making bolt-on acquisitions.

Costa along with these top ASX shares could some of the best ASX shares to own in 2019 if things go well.

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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.

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