ASX investors may choose supermarkets over Wesfarmers shares after ACCC inquiry: broker

Goldman Sachs says ASX supermarket shares are trading at attractive valuations.

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A female Woolworths customer leans on her shopping trolley as she rests her chin in her hand thinking about what to buy for dinner while also wondering why the Woolworths share price isn't doing as well as Coles recently

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Wesfarmers Ltd (ASX: WES) shares have had an impressive run of share price growth over the past year.

Yesterday, the market's biggest consumer discretionary share closed at $64.61, up 1.24% for the day, and up 31.7% over the past 12 months.

After such a strong run, top broker Goldman Sachs reckons Wesfarmers shares may lose some investor support to ASX supermarket shares, given their attractive valuations these days.

Wesfarmers shares downgraded by top broker

On Friday, Goldman Sachs downgraded Wesfarmers shares from a buy rating, which it assigned to the stock on 25 January, to a neutral rating.

The 12-month price target remains unchanged at $68.80.

Analysts Lisa Deng and James Leigh explained that their earnings expectations for the conglomerate have not changed, but their buy thesis has now "played out".

They also commented that Wesfarmers shares may lose some support from investors in favour of fallen ASX supermarket shares amid the Australian Competition and Consumer Commission (ACCC) inquiry.

The ACCC inquiry is examining supermarkets' pricing practices and the relationship between wholesale, including farmgate, and retail prices. Essentially, it seeks to determine whether supermarkets are price-gouging customers. An interim report is due by 31 August, and a final report is due by 28 February 2025.

What's happening with ASX supermarket shares?

The two major supermarket shares on the ASX are Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL).

There's also ASX mid-cap stock Metcash Ltd (ASX: MTS), which owns the IGA and Foodland grocery store networks, the Cellarbrations, Porters Liquor and Bottle-O liquor brands, and the Mitre 10 chain.

While Deng and Leigh do not name specific supermarket stocks, they point out that they are trading at historically attractive prices.

The analysts said:

As the supermarket ACCC inquiry concludes, we expect the regulatory overhang on supermarkets to dissipate, potentially drawing capital away from WES given the supermarkets' more attractive valuation.

What's the P/E comparison to Wesfarmers shares?

According to CBA data, Wesfarmers shares are trading on a price-to-earnings (P/E) ratio of 28.7x.

This compares to Woolworths shares at 22.1x, Coles shares at 20.17x, and Metcash shares at 13.85x.

Over the past 12 months, Woolworths shares have fallen 17.67% to close at $31.46 yesterday. Goldman Sachs has a buy rating on Woolworths shares with a 12-month price target of $39.40.

Coles shares have fallen 10.32% to $16.34. The broker has a neutral rating and a price target of $16.30 on the stock.

Metcash shares have gained 4.66% in value over the past year and closed at $3.82 apiece yesterday. Goldman has a neutral rating on Metcash shares with a price target of $3.70.

As mentioned earlier, Wesfarmers shares have gained 31.7% over the past 12 months.

Other inquiries into the supermarkets

Apart from the ACCC inquiry, others have also taken place concurrently.

A Senate Select Committee on Supermarket Prices handed down its report earlier this month.

Its recommendations included creating divestiture powers in the supermarket sector and giving the ACCC the authority to investigate and prosecute unfair trading practices.

Meantime, a formal review of the Food and Grocery Code of Conduct is also underway.

The code's purpose is "to address harmful practices in the grocery sector stemming from an imbalance of bargaining power between supermarkets and their suppliers".

A final report is due on 30 June.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group and Wesfarmers. The Motley Fool Australia has positions in and has recommended Coles Group and Wesfarmers. The Motley Fool Australia has recommended Metcash. 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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