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Is the Coles (ASX:COL) share price in the buy zone?

woman surrounded by question marks as if wondering about as share price
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The Coles Group Ltd (ASX: COL) share price has been a strong performer in 2020.

Since the start of the year, the supermarket giant’s shares are up over 18%.

This compares to an 11.5% decline by the S&P/ASX 200 Index (ASX: XJO) over the same period.

Is it too late to buy Coles shares?

I don’t believe for a second that it is too late to buy Coles shares and continue to see a lot of value in them for long-term focused investors.

One broker that agrees with this view is Goldman Sachs. Its analysts have just retained their buy rating and lifted the price target on the company’s shares to $20.50 following the release of its first quarter update.

This price target implies potential upside of 15.5% for its shares excluding dividends and just over 19% including them.

What did Goldman Sachs say?

Goldman notes that Coles delivered a first quarter update ahead of its expectations this week.

It commented: “Coles group reported 1Q21 sales at A$9,607mn, +10.5% yoy ,+2.6% vs. GSe and including comp store sales growth of 9.7% (7.7% ex Vic and 57% online growth).”

And while the broker notes that its growth slowed towards the end of the first quarter, it feels confident that another strong quarter lies ahead.

“Sales momentum has slowed over end of 1Q21 and into 2Q21 to date (6.4% comp, 5.4% ex Victoria, 45% online growth), however we remain confident of the outlook for 2Q21 due to COL and industry feedback suggesting the sector is well placed for a strong Christmas trading period,” it explained.

What about the full year?

Following this strong first quarter, the broker has lifted its full year earnings before interest and tax (EBIT) forecast by 0.7% to $1,897 million. This represents growth of 7.6% year on year.

Looking further ahead, Goldman suspects that its might be hard for Coles to repeat its heroics in FY 2022 and is forecasting flat sales. However, due to its belief that the company’s margins will widen next year, it expects FY 2022’s EBIT to come in 5% higher year on year at $1,997 million.

Goldman explained: “We expect the higher growth rate in FY21 to be offset in FY22, implying no change in sales levels for FY22 except in the Liquor division where we believe Coles’ strategic change has resulted in an improvement in the base sales. Overall, we revise FY22 and FY23 EBIT marginally, by +0.2%.”

I think the broker is spot on and feel Coles would be a great option when the market reopens next week.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of 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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