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Goldman Sachs rates Coles Group Limited (ASX:COL) shares a buy

One of the biggest spin offs to hit the ASX in a decade in the form of supermarket and bottle shop giant Coles Group Limited (ASX: COL) hit the ASX boards yesterday after being spun off from investment conglomerate Wesfarmers Ltd (ASX: WES).

The Coles Group share price closed up 0.4%, or 5 cents, to $12.75 yesterday to have a market value around $17 billion, with 1.33 billion shares on issue, compared to a market value of $38 billion for its principal rival Woolworths Group Ltd (ASX: WOW).

According to a Wesfarmers presentation the Coles spin-off that also includes the popular Liquorland, Vintage Cellars and Flybuys brands will have pro forma earnings before interest and tax of $1.4 billion on revenue of $39 billion.

In total it has 2,5000 stores, 112,000 staff members, and 31% of the foodstuffs market in Australia.

Importantly, Coles supermarkets have also now delivered 43 consecutive quarters of like-for-like sales growth, which compares favourably to the medium term track record of Woolworths supermarkets for like-for-like sales growth.

For Coles or Woolworths one point to note is that same-store sales growth is not the be all and end all. In fact profit margins are just as important if not more important and it’s these that have been under pressure across the board over the last five years after the arrival of overseas competitors like Aldi brought some competition to the old supermarket duopoly.

However, the potential for medium term margin pressure does not appear to have put off analysts at Goldman Sachs in their assessment of the outlook for the supermarket.

According to the Fairfax Press, Goldmans’ analysts have put an “outperform” rating on Coles shares with a $14.80 “price target”.

While, according to other financial news wires, Macquarie Group Ltd (ASX: MQG) is still keen on Wesfarmers shares after the demerger, calling for them to hit $36.51 in time, which is nearly 20% above today’s price of $31.42.

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Motley Fool contributor Yulia Mosaleva owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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