The Coles Group Ltd (ASX: COL) share price is surging ahead of the Woolworths Group Ltd (ASX: WOW) share price today as UBS questions whether the performance gap between the two is closing.
The COL share price jumped to its highest level this year when its shares rallied 2.2% at $12.60 in morning trade when the WOW share price is trading flat and the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is 0.3% in the black.
The Coles supermarket business is seen as the poorer brother to Woolworths even before its demerger from Wesfarmers Ltd (ASX: WES) as Woolworths has been winning market share and is regarded by analysts are being the better run supermarket.
But the latest Supermarket Supplier Survey by UBS showed signs that Woolworths advantage over Coles may have peaked.
The survey, which is the 25th in the series, asked 43 suppliers to rank the two supermarket giants across 26 issues.
UBS claims that there is a 73% historical correlation between the survey results and like-for-like (LFL) sales differential between Coles and Woolies since 2007.
That's a significant correlation, and if the results are extrapolated, it bodes well for the Coles share price for 2019.
While suppliers rated Woolworth's Christmas trading performance above that of Coles, UBS noted that the results weren't as convincing as they were for the 2017 Christmas period.
"Coles' scores improved in all 26 sub-categories and closed the gap to WW [Woolworths] in 24 subcategories, a reversal vs. 12m ago," said the broker.
"While Coles didn't win Christmas, the consensus was less definitive vs. the pcp. The biggest areas of improvement are in staff morale/enthusiasm, store theatre (despite improvement) and sharing data."
This isn't to say Woolworths isn't performing well. Its scores from the survey are approaching historical highs, although its lead over Coles has contracted by 0.5 percentage points and there's a chance that the LFL sales gap between the two will contract more quickly than what the market is expecting.
Nonetheless, UBS prefers Woolworths and is rating the stock a "buy" while it has reiterated its "sell" call on Coles due to concerns over costs and the performance of its petrol station business.
This view is echoed by Deutsche Bank even as the broker is tipping higher supermarket food price inflation (which is a good thing for the supermarkets as that will boost LFL sales growth).
"WOW remains our preferred exposure," said Deutsche. "COL's valuation is looking more attractive but we see downside risk to Coles Express."
