Why Coles shares could be a best buy for blue chip investors

Bell Potter thinks Coles is the best supermarket to buy this month.

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Happy woman looking for groceries. as she watches the Coles share price and Woolworths share price on her phone

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Coles Group Ltd (ASX: COL) shares could be a great option for an investment portfolio this week.

That's what analysts at Bell Potter think, which have recently named the supermarket giant on their Australian equities panel.

The broker highlights that its panel of favoured Australian equities offer attractive risk-adjusted returns over the long term. It then explains:

We consider the current macro-economic backdrop and investment environment, focusing on quality companies with proven track records, capable management and competitive advantages. We've examined our analysts' buy-rated stocks and preferred high conviction calls, to identify our preferred stocks in a range of sectors.

Why are Coles shares on the list?

Bell Potter added Coles to its preferred stock panels in response to its half-year result from last month.

It notes that Coles reported EBIT of $1,064 million for the six months, which was ~5% ahead of its estimates and the analyst consensus.

In addition, it points out that management has multiple levers for profit improvement. These include its private label positioning attracting price conscious consumers, further reductions in theft rates through technology and operational improvements, growing Coles 360 media income, and productivity improvements from the Witron automated distribution centres.

It is for these reasons that the broker prefers Coles shares over rival Woolworths Group Ltd (ASX: WOW) and is forecasting earnings ~5% above consensus estimates in FY 2025.

Plenty of upside potential

Although Coles shares have rallied 6% since this time last month, Bell Potter sees scope for much bigger returns over the next 12 months.

The broker has put a buy rating and $19.00 price target on its shares. This implies potential upside of 15% for investors.

In addition, the broker is expecting a 4% dividend yield over the period, which lifts the total potential return to approximately 19%.

It concludes:

Costs are expected to remain elevated but should moderate through FY24 and FY25 as general inflation tapers off. In the medium term, 1) higher immigration should support grocery spending, and 2) Coles is entering a period of elevated capex intensity as it reinvests to modernise its supply chain and to catch up to competitors on online and digital offerings, which should help Coles maintain its market position.

Motley Fool contributor James Mickleboro 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 Coles Group. 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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