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Is the Coles share price a buy?

Is the Coles Group Limited (ASX: COL) share price a buy?

Since the start of March 2019 the Coles share price has risen by 11.9%, so it shows that even a supposed defensive share like Coles can sometimes deliver quick double digit returns.

The release of the 2019 half-year report was the start of the share price growth we have seen recently.

The December 2018 result was the 45th consecutive quarter of supermarket comparable sales growth with group sales up 2.6%.

Coles’ main two divisions delivered earnings before interest and tax (EBIT) growth. Supermarket EBIT grew by 0.4% to $602 million and Liquor EBIT increased by 7%, however Coles Express experienced a 39.3% decline of EBIT to $51 million, but this is unlikely to be repeated, in-fact it could be reversed in coming months with the new deal.

In the March 2019 quarter, Coles delivered further supermarket and liquor growth. The Supermarkets division grew sales by 3.2% with comparable sales growth of 2.4%. Liquor sales grew by 4.3% with comparable sales growth of 3.5%.

Interestingly, Coles Supermarkets actually experienced price inflation of 0.9%, although excluding tobacco and ‘fresh’ prices declined by 0.9%. Sales per square metre also grew by 0.9%.

I think one of the most promising things about Coles’ medium-term future is the new exclusive partnership with Ocado Group to bring the world’s leading online grocery platform, automated single pick fulfilment technology and home delivery service to the country.

Under the agreement, Coles’ two planned fully automated ‘Customer Fulfilment Centres’ will be built, one located in each of Melbourne and Sydney prior to the end of FY23.

Improving efficiencies, eCommerce capabilities and economies of scale is imperative for a part-logistics business like Coles.

Foolish takeaway

Coles is currently trading at 20x FY20’s estimated earnings with a projected grossed-up dividend yield for FY20 of 6%. Coles is looking a little too expensive for me at the moment, I don’t think it’s a buy today and nor is Woolworths Group Ltd (ASX: WOW).

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET. 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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