There are a number of ways for investors to gain exposure to the supermarket industry on the Australian share market.
But investors should be selling Coles Group Ltd (ASX: COL), holding Woolworths Group Ltd (ASX: WOW), and buying Metcash Limited (ASX: MTS) shares according to one leading broker.
What did the broker say?
According to a note out of Morgan Stanley, its analysts have a preference for Metcash right now.
On Monday the broker reiterated its overweight rating and increased its price target by 5 cents to $2.95 a share.
Morgan Stanley believes that concerns over Metcash's core grocery distribution business have been overblown. There have been worries that it is in a structural decline after the loss of two key customers in 2019.
However, the broker believes its issues are cyclical and expects them to turn in the medium term. It also sees Metcash as a winner from the rebounding housing market.
What about Coles and Woolworths?
Morgan Stanley is reasonably bearish on supermarket giant Coles at this point. It has downgraded its shares to an underperform rating with an improved price target of $13.50.
This downgrade was made largely on valuation grounds after a strong rise over the last 12 months.
The broker is a little more positive on rival Woolworths. It has upgraded its shares to an equal-weight rating and lifted its price target to $36.50 after increasing its earnings forecasts.
This follows an easing of deflationary pressures, improvements with its online business, and its positive supply chain initiatives. It also expects its margin advantage over Coles to be sustained over the medium term due to its scale advantage.
Whilst I think that Morgan Stanley makes some good points, I wouldn't be a seller of Coles' shares. I continue to believe it would be a great long-term investment due to its refreshed strategy and focus on automation.
