On Thursday the Coles Group Ltd (ASX: COL) share price tumbled lower after an update on its Convenience business revealed that tough trading conditions had impacted its profits.
The Coles share price finished the day 2.5% lower at $12.41.
Is this a buying opportunity?
I think this ought to be considered a buying opportunity, especially after retail sales data out of the Australian Bureau of Statistics revealed that supermarket sales are growing strongly.
This data caught the eye of analysts at Goldman Sachs. It notes that rolling 12-month supermarket sales are at +3.7%, with the month of December even stronger at +4.7%.
According to a note out of the investment bank this morning, this data suggests a more buoyant underlying trend for supermarkets than it previously expected.
The good news for Coles, Woolworths Group Ltd (ASX: WOW), and Metcash Limited (ASX: MTS), Goldman believes there will be more of the same in 2019 and 2020.
Its analysts estimate supermarket sales growth will be 4.25% in FY 2019 and then 4.5% in FY 2020.
In light of this solid growth, it believes supermarket margins are going to widen, putting Coles and Metcash in a position to profit.
Goldman has a buy rating and $13.50 price target on Coles' shares at present, implying potential upside of approximately 9% over the next 12 months.
The broker has a conviction buy rating on Metcash's shares with a $3.30 price target. This price target implies potential upside of over 29% for the wholesaler and distributor's shares.
Should you invest?
Due to its high levels of short interest, I'm staying clear of Metcash for the time being.
But I see Coles as a great option for investors, especially income investors that are on the search for generous dividends. Whilst its dividend plans for FY 2019 have not been announced yet, the company has previously suggested that it would pay out 80% to 90% of its earnings.
Based on Goldman's estimates for FY 2020, this would equate to a forward dividend yield in the region of 5.1%.
