Costa Group (CGC.AX): Great Company, But Its Stock Price Is Running Out of Steam

Australian produce company Costa Group (CGC.AX) has gotten a new set of analyst eyes on its stock. Larry Gandler of Credit Suisse initiated coverage on the stock, saying he’s expecting strong earnings growth over the medium term. However, Gandler points out that Costa Group’s share price has reached its peak and therefore closed out near-term investor returns. As such, he suggests investors await an attractive entry point.

To reflect his neutral analysis, Gandler initiates coverage on CGC with a Neutral rating and price target of A$7.35.

“Since 2014, Costa has demonstrated a track record of delivering earnings growth and improved returns on the back of investing in production capacity (farms and plantings.) Costa is emerging from a period of intense investment which, in our view, will support strong earnings growth over the next few years. Earnings growth is sourced from additional volume and acquisition growth,” Gadler says.

The analyst has a variety of reasons for believing in the growth of Costa. The company exports as much as 70% of its citrus (mostly oranges and mandarins) to Asia, as Australia is counter-seasonal to China. In addition to citrus, the company does a lot of exporting avocados and berries, in which Costa is the leader in global berry production. The analyst also notes that blueberry consumption happens to be growing in Europe. All that aside, Gadler has a favorite item Costa produces…

“We think Costa’s key Australia profit engine is its mushroom operation and that segment has good industry structure with concentrated market shares. Costa is the industry leader. Mushroom production is industrialised, not affected by climatic conditions and therefore generates relatively predictable profit and cash flow,” Gadler asserts.

Despite the excitement over the fungus, the analyst notes the dangers the company is up against as well. “We consider the main risk to be output price or volume fluctuations due to short-term supply/demand dynamics — often affected by growing conditions. Consensus estimates factor strong growth implying all segments/geographies achieve desired growth. But, Costa’s diversity means agricultural risk may become manifest. Costa’s debt is expected to be temporarily high at the December balance date given recent investments,” the analyst explains.


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