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Can the momentum continue for the Tassal share price?

At the beginning of last month, the Tassal Group Limited (ASX: TGR) share price traded as high as $5.16 per share. This price represents a more than 30% increase from the same time last year. Unfortunately, this strong upward trend did not continue through the month of May, but a rally late last week did allow TGR shares to make up some of the lost ground. Tassal closed the week at a price of $4.95 per share.

What to expect from Tassal

In February this year, Tassal announced what it described as its ‘best ever first-half results’. These results saw operating NPAT and cashflow both increase significantly in comparison to the first half of last year. A record harvest tonnage was also reported. The improvements in these metrics is a positive sign for Tassal, with the increases likely contributing, in part, to the rise in the price of TGR shares. 

In a media release associated with its half-yearly results, Tassal stated that demand for salmon continues to outstrip supply. Huon Aquaculture Group Ltd (ASX: HUO), a competing salmon producer, has reported similar findings. These market conditions are another positive sign for the future of Tasmanian salmon farmers. It’s also a reason to be optimistic that the share prices upward momentum will continue.

If we consider environmental factors, the outlook for Tassal’s share price is less clear. It wasn’t that long ago that Tassal and its competitors were in the news regarding concerns for the negative environmental impact of salmon farming. More of this type of negative publicity would likely be very bad news, at least in the short term, for investors. A move to farm salmon further offshore is one option Tassal has to reduce this risk as it’s deemed more environmentally friendly. Adapting to the rising sea temperatures in Tasmania is another environmental challenge Tassal faces.

Foolish Takeaway

Return on equity, which is a good measure for the performance of a company, has been relatively stable for Tassal over the past ten years. This stability helps to generate a more accurate valuation of the company.  Based on this data I believe the current TGR share price is too high to justify an investment, especially when considering the environmental concerns. I believe the future is bright for Tassal and it is possible that the share price will continue to rise. Unfortunately, this cannot be guaranteed, which leads me to think that, for now, the best option is to look elsewhere for investments opportunities.

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Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.