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Why today’s news could be a good catalyst for the Costa share price

agriculture, farming, grains,

The Costa Group Holdings Ltd (ASX: CGC) share price could be on course for a useful boost over the coming months after a pleasing development.

According to the ABS (Australian Bureau of Statistics), inflation was virtually flat in three months to 31 March 2019, although inflation registered 1.3% over the twelve months to the end of last month.

However, within those figures the ‘vegetable’ part of the inflation numbers saw a price increase of 7.7%.

Costa has been under severe pressure in recent months due to subdued demand and lower food prices. However, such a large price increase should benefit Costa immensely as price increases will likely mostly fall to the bottom line.

If Costa grows the same amount of food each year the growing costs will be roughly the same, the distribution costs will be roughly the same and so on. Any additional money that Costa receives for its produce will mostly fall to the bottom line as pure additional profit.

With Costa growing tomatoes, mushrooms, avocados, citrus fruit and berries it’s easy to see that it should be a winner if vegetable prices have indeed risen by nearly 8% in just three months. I can attest to the increase in price of tomatoes – I’ve seen a substantial increase at my local supermarket.

The December 2018 result was tough reading for Costa shareholders, but Costa management are now predicting underlying profit growth of at least 30% in the 2019 calendar year and compound annual profit growth may continue at more than 10% per annum in the subsequent years.

Foolish takeaway

I like Costa’s multiple growth avenue approach to growing its business and it’s now trading at 20x FY20’s estimated earnings. I think it’s a decent time to be buying a parcel of Costa shares with some investors still uncertain after the disappointing earnings and negative share price movements.

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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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