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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 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.
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