The Woolworths Group Ltd (ASX: WOW) share price may have outperformed the S&P/ASX 200 Index (Index:^AXJO), but it may have more room to climb.
That's the bullish assessment by UBS, which pointed out that rising grocery prices will give the second lift.
Anyone doing the grocery run during the COVID-19 lockdown won't be surprised by the news on food inflation. I've certainly been feeling this at the checkout, and this includes grocery discount chain Aldi.
Higher prices are "sticky"
What this signals to me is that higher prices are here to stay as the supermarket giants don't seem interested in discounting prices to win market share.
What UBS did is to quantify the price increase. The broker noted that food inflation is up 1.7% year-on-year in the March quarter compared to the 1% rise in the previous quarter.
Price rises were recorded at Woolworths and rival Coles Group Ltd (ASX: COL), and spans across fresh and dry food categories.
COVID-19 brings supermarket wars to an end
"Both COL & WOW recorded positive price improvements, with WOW recording its first positive dry inflation quarter since we began collecting the y/y data (Jan-18)," said the broker.
"While challenges exist in interpreting March data given the COVID-19 impact (material reduction in promo's), we do believe that promotional intensity will fall going forward."
There doesn't seem to be much motivation for the major supermarkets to engage in promotional activity given the level of panic buying since the coronavirus outbreak.
Management teams are probably more focused on restocking depleted shelves and won't have to discount to drive incremental sales.
Rising prices, fatter margins
The lockdown of almost the entire country are driving households to buy more groceries. Baking and cooking are one way to keep adults and kids entertained during the isolation.
The buying frenzy and their defensive business models have helped supermarket shares hold their ground even as the pandemic sent the ASX and global share markets into a bear market.
"The latest UBS Evidence Lab data gives us confidence in upside to our 7% CY20 (4%+ pa medium term) market growth estimate," said UBS.
"Our inflation deep-dive suggesting listed grocers significantly outperform in periods of upper quintile inflation."
Rising sales, improving margins and potential structural benefits from increasing at-home meal occasions have prompted the broker to slap a "buy" on Woolworths and Metcash Limited (ASX: MTS). The broker rates Coles as "neutral" (equivalent to a "hold").
