Comparing two popular ASX 200 blue-chip shares from the same sector can be a great exercise for any Australian investor. Not only can you get a good look under the hood of two dominant businesses, but you can also see exactly how the market is valuing two sets of cash flows coming out of the same industry.
It's hard to compare the dividends and earnings of a bank, for example, against a tech stock and come to a coherent valuation case for both. But when two companies are both deriving their earnings from the same base, things get a lot more interesting.
So today, let's put this into action by comparing the valuations of the two largest supermarket operators and grocers in Australia – Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL).
Woolworths and Coles are great companies to compare, as they are direct competitors in the grocery space. Although both companies have auxiliary earnings streams – Coles' bottle shops and Woolies' Big W chain – both derive the lion's share of their earnings from their supermarket businesses.
Normally, it would be easy to compare these two companies' valuations by looking at their price-to-earnings (P/E) ratios on an annualised basis.
Woolies vs. Coles
But thanks to some unusual disruptions in Woolies' recent earnings, this isn't very useful right now. At of yesterday's close, Woolies seems to trade on a ridiculous P/E ratio of 1,965.5, whilst Coles is on a far more normal 20.87.
So instead, what we will do is take both companies' earnings per share from their recently-announced half-year results covering the six months to 31 December, and see how they compare.
For those six months, Woolies revealed a basic earnings per share (EPS) of 76.2 cents, which was up 2% from the same period in 2021.
At the last Woolworths share price of $30.78, this would give the company a P/E ratio of 40.49, or 20.2 on an annualised basis.
In Coles' case, the company reported a basic EPS of 44.5 cents for the half year, which was down 8.5% on the prior corresponding period.
At the last Coles share price of $16.28, this would give the company a P/E ratio of 36.58, or 18.29 on an annualised basis.
So, on a like-for-like basis, Coles shares are currently cheaper than Woolworths shares. Put another way, investors are being asked to pay more for $1 in Woolworths earnings than $1 in Coles earnings.
That's despite Woolworths shares having an awful year compared to its arch-rival. 2024 to date has seen the Coles share price rise 0.74%. In contrast, Woolies stock has collapsed by 17.94%.
We can see this reflected in both companies' dividend yields. Right now, Woolworths is trading on a dividend yield of 3.41%, but Coles offers a lot more with its 4.05% yield.
So Coles shares are cheaper. But does that make them a better ASX 200 buy today?
Which ASX 200 stock to buy?
Normally, investors would feel justified in paying a higher share price relative to earnings for a higher-quality business. Until this year, it was obvious that Woolworths was the better ASX 200 blue-chip share compared with Coles, thanks to its higher market share.
But recent updates from both companies have muddied the waters of that assumption.
Earlier this month, Woolworths reported a 2.8% rise in total sales to $16.8 billion over the quarter ending 31 March. For the first three months of 2024, Woolies enjoyed a 1.5% rise in Australian food sales and a 1.4% uptick in New Zealand food sales. The company's B2B business stood out though, banking a 3.2% spike in sales.
However, Coles put up some far more impressive figures over the same period. Coles revealed that its sales revenue for the quarter rose 6.4% over the previous year's equivalent quarter to $10.03 billion.
Supermarket sales were up 5.1%, whilst liquor sales fell 1.9%.
Foolish takeaway
If I were deciding between these two blue-chip ASX 200 shares today for an investment, I would probably want to wait until I saw the next quarter's numbers before making a final decision. I would want to see Coles' superior quarter as part of a long-term trend, not just a one-off fluke. If this is the case, Coles could be the pick of the two today, given its lower P/E ratio and higher dividend yield.
However, if I had to make the decision today, I would probably go for Woolworths shares. The company is trading at its lowest share price in years today, and yet remains the dominant grocer in the Australian market. The difference in earnings multiples between the two companies has rarely been as close as it currently is, at least going off the figures we used earlier.
So, although Coles' recent numbers almost make it more appealing than Woolworths, I would still have to wait for a clear trend to emerge before taking the plunge with Coles today.
