Forget Woolworths Group Ltd (ASX: WOW)! It's the Metcash Limited (ASX: MTS) share price that's set to outperform through to December, according to Morgan Stanley.
Metcash's share price jumped 1.1% to $2.83 on Friday when the Woolworths and the Wesfarmers Ltd (ASX: WES) share prices slumped into the red even as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index managed to clawback from losses to end 0.1% higher.
Morgan Stanley is telling investors to expect more of this outperformance as it is rating the probability of Metcash to beat the market over the next 45 days at 80% plus.
The bullish call comes on the back of Woolworth's pleasing quarterly sales update that sent its share price jumping higher on Thursday.
One of the factors supporting sales growth at Woolies supermarkets is easing food price deflation as the prices of a range of groceries, such as meat, have been rising due to the drought.
Food prices are expected to keep rising in the interim and Morgan Stanley believes Metcash will be a bigger beneficiary of this than Woolies or Wesfarmers' owned Coles supermarkets.
"Food inflation has accelerated in the recent quarter with both Coles and Woolworths reporting better than expected 1Q19 sales," said the broker.
"We think MTS is the largest beneficiary of food inflation given it benefits from stock profits and generates the thinnest operating margins. We think the discounted valuation (11.7x FY19e P/E) with minimal debt is attractive."
While Woolworths is recognised by many experts as being the best run listed supermarket, some, including Morgan Stanley, thinks the stock is too expensive as it is trading on an FY19 price-earnings (P/E) multiple of around 21 times.
Morgan Stanley has an "underweight" recommendation on Woolworths with a $23 a share price target and an "overweight" rating on Metcash with a price target of $3.90 a share.
But it isn't only Morgan Stanley that is taking a bearish view on Woolies. Macquarie Group Ltd (ASX: MQG) is also urging investors to dump the stock despite its well-received quarterly update.
"Clearly there has been a market share shift in the last quarter – with both Food and Liquor sales (~85% of group earnings) slowing in 1Q19," said Macquarie.
"While LFL sales growth appears to have stabilised at the end of the quarter, the market is paying for evasive operating leverage. At 21x we see little value in WOW."
Macquarie had a price target of $27.91 on Woolworths.
