Why is the Metcash (ASX:MTS) share price smashing Coles this year?

Metcash has materially outperformed Coles in 2021.

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The Metcash Limited (ASX: MTS) share price has substantially outperformed Coles Group Ltd (ASX: COL) in 2021.

In the calendar year to date, Metcash has gone up 26% whilst Coles has actually declined almost 3%.

Despite being a much smaller business, Metcash is more diversified. It has three different pillars: food, liquor and hardware.

In food, it’s the largest supplier to independent supermarkets in Australia, namely IGA and Foodland.

Metcash is the second largest player in the liquor market, it supplies around 90% of independent liquor stores in Australia including Cellarbrations, The Bottle-O, IGA Liquor, Duncans and Thirsty Camel.

With its hardware division, it’s the second largest player in the Australian hardware market. Its hardware network now has more than 700 stores across the brands Mitre 10, Home Timber & Hardware and recently Total Tools.

Direction of sales and profit

Investors often like to look at the most recent performance of a business to indicate where the share price could, or should, be trading. The Coles share price and Metcash share price may be influenced by what the respective businesses have most recently announced.

Coles said in its FY22 first quarter that its total sales were up 1.5% year on year, with supermarket sales up 1.8%.

In the first four weeks of the Coles second quarter, supermarket comparable sales were “broadly in-line”, Express volumes were being impacted but expected to make a recovery in the second half as mobility increases.

Looking at Metcash, it just reported its FY22 first half, where overall revenue was up 1.3%. Excluding the loss of 7-Eleven, food sales were down just 0.2%. Liquor sales were up 6.6% and hardware sales were up 17.9%.

Hardware is the profit driver of the business at the moment. Hardware earnings before interest and tax (EBIT) jumped 53.3%, or $34.4 million, to $98.9 million. Metcash’s underlying EBIT increased 13.9% to $231.2 million, so hardware played a significant role in growing profit.

Continuing growth for Metcash

Whilst Coles mentioned in its update that sales were broadly flat in October, Metcash is seeing continuing “strong sales” growth.

In the first five weeks of its FY22, total food sales were up 2.3%, liquor sales were up 7.6% and hardware sales were up 20.1%.

Investors may be factoring in that elevated level of growth into their thoughts about the Metcash share price.

Are Metcash shares good value?

The analysts at Macquarie Group Ltd (ASX: MQG) think that Metcash is a buy, with a price target of $4.70 after seeing the half-year result and how strongly the hardware division performed.

Macquarie notes the ongoing initiatives that Metcash is doing, including investing in e-commerce. But inflation and COVID-19 effects on the supply chain could be problematic.

Based on Macquarie’s projections, the Metcash share price is valued at 15x FY22’s estimated earnings with a grossed-up dividend yield of 6.5% for FY22.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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