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Why The Share Price Of Costa Group Is Down Over 25% This Morning?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Costa Group (ASX:CGC) sold off heavily this morning after investors reacted negatively to a heavily discounted capital raise from institutional investors. The offer did, however, receive very strong institutional support, with investors taking up 88% of the shares on offer. The company now trades on ~12x FY21 EPS, so some investors are now of the conviction that the company is oversold.

Costa Group Holdings - don over 25
Costa Group selectively breeds and produces products like blueberries, that sell at a premium in global markets.

One big driver of the company’s share price is market perceptions around earnings quality. The stock sold off 40% when an earnings miss highlighted that the company’s exposure to cyclicality within both agriculture and the economy more broadly was much higher than what the market expected.

The company is trying to improve earnings quality through programs allowing blueberries to grow in different climates, in addition to gaining a competitive advantage through process automation. Success in these endeavours could result in margin expansion, which would attract a higher earnings multiple from the market and drive a share price re-rate.

Costa Group has a natural competitive advantage through producing selectively bred agricultural products, which are more attractive to consumers and are better able to withstand changes in weather patterns. One example is the Driscoll’s enlarged blueberries, which most consumers believe taste better than normal blueberries. Costa Group’s ARANA variety sells at a price premium around the world and is the leading variety of blueberries in international markets.

Despite the company’s nature as a food and grocery business, the company is more economically sensitive than most sector peers. This is because consumers will still cut down on expensive food items like blueberries, despite the food being a consumer staple since they save money rotating to other products that Costa Group does not sell.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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