The Coles Group Ltd (ASX: COL) share price has been a positive performer in 2020.
Since the start of the year, the supermarket giant's shares have climbed approximately 6.5% from $15.00.
And while Wesfarmers Ltd (ASX: WES) may have decided to take some profit off the table last week, one leading broker believes its shares can go a lot higher from here.
Who is bullish on Coles?
According to a note out of Goldman Sachs, its analysts have upgraded its shares to a buy rating with an $18.10 price target.
This price target implies potential upside of 13.2% over the next 12 months excluding dividends. But if you include the dividends the broker expects Coles to pay over that period, this potential return stretches to almost 17%.
Why is Goldman Sachs bullish on Coles?
There are four key reasons that Goldman Sachs is bullish on Coles. These are positive sector trends, the exit of a potential long term threat, the delivery on its strategy, and its outlook post-FY 2023.
In respect to positive sector trends, Goldman notes that after a prolonged period of subdued inflation due to price competition, rational competition is emerging in the supermarket sector and is leading to improving inflation.
Goldman said: "with the food category expected to grow at +4.25% in FY20 and 4.5% thereafter. We believe that Coles Group is well-placed to take advantage of this sector recovery through its omni-channel supermarket model."
The exit of a potential long term threat occurred last month when German giant Kaufland announced its surprise exit from the market. Goldman believes this suggests a less intense longer-term competitive environment in the supermarket sector.
The broker is also pleased with the way the company is delivering on its strategy. With the the release of its half year results, Coles reported that its medium-term strategy is progressing in line with expectations. By FY 2023, the company expects to deliver cumulative cost savings of $1 billion in the form of both COGS and CODB improvements.
Finally, Goldman believes its outlook post-FY 2023 is very positive. It notes that the aforementioned strategy is "only a bridge to the FY23, before the launch of the supply chain upgrades and the Ocado CFCs deliver a more competitive operating structure."
And while it believes its in-store execution continues to lag Woolworths Group Ltd (ASX: WOW), its interim results have "provided a degree of confidence in the progress of the strategy execution and we expect medium term conditions to remain supportive across the industry."
I think that Goldman Sachs is spot on with Coles and I would be a buyer of its shares next week.
