The Coles Group Ltd (ASX: COL) share price has been falling in recent weeks. Could the supermarket giant now be a buying opportunity?
As a supermarket network, Coles is able to pass on inflation increases to consumers through higher prices on the shelves. If it maintains the same earnings before interest and tax (EBIT) margin, then a price inflation can benefit the company's bottom line net profit.
At the time of writing, the Coles share price is down 0.51%, trading at $17.57.
How has the company performed recently?
In its FY22 third quarter for the 12 weeks to 27 March, Coles said total sales increased by 3.9% to $9.3 billion. The supermarkets segment saw sales growth of 4.2% to $8.23 billion.
The company noted that floods in South Australia caused some logistical disruptions into Western Australia and the Northern Territory. Floods in New South Wales and Queensland saw 130 stores temporarily close across supermarkets, liquor and the Coles Express network.
It also noted that cost price inflation is impacting suppliers as a result of increased raw material, commodity, shipping and fuel costs.
In addition, local shopping trends re-emerged with the contribution from neighbourhood stores becoming greater, compared to shopping centres and CBD stores. Supermarket e-commerce sales growth was 45%, reflecting increased capacity investments.
Coles also said that in the fourth quarter to date, it recorded a "solid" trading period, with no COVID-19 related restrictions on traditional family events such as Easter.
The ASX share said it was continuing to manage the ongoing impacts from the third quarter's disruptive events. Availability was improving as the supply chain recovered. COVID-19 costs are expected to continue to moderate further.
However, supplier input cost inflation was expected to continue in the fourth quarter and into FY23. Coles said it would continue to focus on providing "trusted value" for customers to ease the burden from cost of living pressures.
What do brokers make of the Coles share price?
The broker Morgans currently rates Coles as a buy, with a price target of $20.65. That implies a possible rise of 17% over the next year. Morgans noted that the third quarter update was better than expected, despite various COVID-19 impacts and other disruptions.
Morgans values the Coles share price at 24x FY22's estimated earnings with a grossed-up dividend yield of 4.9%.
Macquarie is another broker that rates Coles as a buy. The price target is $19.70, suggesting a possible upside of more than 10%. The broker thinks that a business like Coles in the food and staples retailing sector can do better than ASX shares in some other categories.
Due to the potential for (and evidence of) price/earnings (p/e) ratio de-ratings for many ASX shares during these times of rising interest rates, a lower p/e ratio business like Coles could do better.
Macquarie numbers imply that the Coles share price is valued at 23x FY22's estimated earnings and a potential grossed-up dividend yield of 5%.
However, Credit Suisse rates the Coles share price as 'neutral', with a price target of $18.81. That suggests a mid-single-digit rise. One of the reasons it's less optimistic is because it doesn't think Coles' profit margins will do as well as other investors are expecting.
Credit Suisse thinks the Coles share price is valued at 23x FY22's estimated earnings with a grossed-up dividend yield of 5.1%.
In FY23, all three brokers are expecting a slight increase in profit and dividend growth.
