Is the Coles share price an inflation hedge?

The Coles share price has been rising. Can it be a hedge against inflation?

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Key points

  • The Coles share price has risen in 2022
  • It’s passing on inflation rises to customers
  • Some brokers, including Citi, rate it as a buy

There has been a lot of volatility since the start of 2022. Many ASX shares have seen declines. However, the Coles Group Ltd (ASX: COL) share price has been rising. Does this mean it's a hedge against inflation?

Since the beginning of the 2022 calendar year, at the time of writing, the Coles share price has risen by around 3%. That compares well against the S&P/ASX 200 Index (ASX: XJO) which has fallen by more than 7%.

There is a lot of investor attention on inflation and potential interest rate rises.

What's going on with the Coles share price and inflation?

There are some businesses that are able to pass on inflation costs to customers, leading to organic revenue growth.

If Coles were to earn the same profit margins, then higher inflation/revenue can help grow the net profit after tax (NPAT).

In the recent FY22 third-quarter update from Coles, the supermarket business said inflation steadily increased throughout the third quarter, with total supermarkets price inflation of 3.3% compared to deflation of 0.2% in the sector quarter.

Coles said that of the supplier input cost inflation requests received, the primary rivers were "raw material, commodity, shipping and fuel costs". Meat inflation was "largely a result of elevated livestock prices". There was inflation in vegetables such as cucumbers, broccoli, and tomatoes, with floods in Queensland and NSW impacting availability.

The ASX share also said that supplier input cost inflation is expected to continue in the fourth quarter and into FY23.

Third-quarter recap

Coles reported that, for the quarter, its supermarket sales increased by 4.2% to $8.23 billion. Liquor sales increased by 2.8% to $784 million and Express sales fell by 2.1% to $285 million.

The company said that a high number of COVID-19 Omicron cases in January resulted in increased "absenteeism" with a large number of Coles and supplier team members required to isolate. This led to availability challenges and short-term impacts to stores and distribution centres.

COVID-19 impacts on shopping habits are also dissipating. Coles said that "local shopping trends re-emerged with the contribution from neighbourhood stores greater, as compared to shopping centres and CBD stores".

Is the Coles share price a buy?

Morgans rates Coles as a buy, with a price target of $20.65, implying a potential rise of more than 11% over the next year on the current price of $18.49.

The broker also noted the comments made by Coles about trading in the fourth quarter. Coles said:

In the fourth quarter to date, Coles has recorded a solid trading period with no COVID-19 related restrictions on traditional family events such as Easter … pleasingly availability continues to improve as the supply chain recovers. COVID-19 costs are expected to continue to moderate further, particularly as public health requirements are eased.

Another broker that rates Coles as a buy is Citi, with a price target of $19.30. It thinks the supermarket business will benefit as consumer habits and the supply chain normalise.

According to Citi, the Coles share price is valued at 22x FY23's estimated earnings with a projected FY23 grossed-up dividend yield of 5.5%.

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 has positions in and has recommended COLESGROUP DEF SET. 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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