Coles Group on the nose
Recommendation
There are many potential reasons why Coles Group's share price has fallen 11% since we upgraded the stock two weeks ago. Brokers have been generally unenthusiastic, reinforcing the negative sentiment around the stock. Perhaps shareholders are buying the line that Coles is a low-growth business, or are worried about Amazon's grocery offer under-cutting the major chains.
Then there's the news that Woolworths has apparently regained sales momentum after losing it to Coles' Little Shop promotion in the first quarter. Woolworths has launched its own Christmas cardboard collectibles campaign, and has been particularly aggressive with 'money-off' promotions in the lead-up to Christmas. Coles, by contrast, has trotted out a somewhat tone-deaf re-run of the Little Shop plastic collectibles promotion over Christmas.
To top it off, chief executive Steven Cain's performance incentive will be measured from the day after the half-yearly results are released in February. He probably doesn't have much interest in talking up the company until then.
All these issues, however, are known and within expectations. We know Coles is lagging Woolworths, which is the source of the opportunity.
With Coles' share price being so weak, the opportunity looks compelling. The stock is now trading on a prospective 2019 PER of 16 on earnings that we believe are likely depressed. It's now at a very significant discount to Woolworths on every metric - and sports a prospective dividend yield of 5.2%.
There's always the possibility we're missing something - or that Coles is falling in a heap over the important Christmas trading period. While our valuation hasn't changed, we're going to increase our margin of safety. We're lowering our Buy price to $13, but that still means Coles is a BUY.
Disclosure: The author owns shares in Coles Group.