How low can the Costa Group Holdings Ltd (ASX: CGC) share price go? That's the question investors will be asking themselves as the fresh food supplier's stock came under renewed selling pressure following its profit warning last week.
The Costa Group share price slumped 5.4% to retest its more than one year low of $3.74 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index lost 0.9% of its value due to escalating global trade tension.
The big underperformance brings a new meaning to smashed avo on a toasted share price! But is Costa Group a buying opportunity that's too hard to ignore after its big slump that has shaved off half CGC's market value?
Overlook the one-off factors
Many top brokers seem to think so as most have held firm to their "buy" call after management announced another profit downgrade last Thursday. The company is now expecting calendar 2019 net profit to grow between a very wide range of 1% and 17% compared to its previous guidance of at least 30%.
But Citigroup is keeping the faith and has reiterated its "buy" call on the stock even as it slashed its price target to $4.45 from $5.80 a share.
"Costa highlighted five factors that dragged down earnings. Our analysis suggests two-thirds of these, or $16 million are temporary and will recover in FY20e," said Citi.
"We are less convinced around pricing in both Morocco and mushrooms, but the growth projects in both these areas still add to earnings growth in FY20e."
Credit Suisse echoed a similar forgiving tone and pointed out that investors should be prepared for unforeseen things to happen when it comes to agriculture stocks.
"Although agriculture risk is likely to prevail we take the view 2020 accounts for some challenges and CGC will be cycling weak comps," said the broker, who its "outperform" rating on Costa Group and cut its price target to $4.50 from $6 a share.
Investor confidence may slowly return and the stock will grow with earnings. Large 2021 EPS growth is due to higher, biennial citrus yields."
Is there a risk for a further share price de-rating?
However not everyone is willing to overlook the shock cut to profit guidance. Macquarie Group Ltd (ASX: MQG) pointed out that Costa Group's gearing looks relatively high and it has a big earnings skew to the first half of 2019.
"Whilst some of [downgrade] factors are 'one-off', there is increasing agriculture/seasonal risk evident which is leading to greater earnings volatility; thus we see some risk of a de-rate from here," said the broker.
"We still see a pathway to low double-digit pa medium term EPS growth but CY19 is now set to be a flat earnings year (on our lower-end forecasts) despite promise of Citrus on-season & strong International growth after a weak 2018."
Macquarie has downgraded the stock to "neutral" as it lowered its price target by nearly $2 a share to $4.05.
