The Coles Group Ltd (ASX: COL) share price has dropped 7% in the past month. While that's not a huge decline, I think it's sizeable for what's meant to be a defensive ASX share.
I like buying good businesses at lower prices if their earnings seem likely to continue growing for the long term.
A lower valuation should mean buying the company at a better price/earnings (P/E) ratio — always good in my book.
I can understand why the Coles share price is lower due to the Australian Competition and Consumer Commission (ACCC) investigation. Let's remind ourselves what happened.
What is the ACCC probe about?
In September, the ACCC took Coles and Woolworths Group Ltd (ASX: WOW) to court alleging that their price drops were misleading for hundreds of common supermarket products.
The ACCC's claims relate to products sold at regular long-term prices, which remained the same, excluding short-term specials, for at least six months and, in many cases, for at least a year. The ACCC stated:
The products were then subject to price rises of at least 15 per cent for brief periods, before being placed in Woolworths' 'Prices Dropped' promotion and Coles' 'Down Down' promotion, at prices lower than during the price spike but higher than, or the same as, the regular price that applied before the price spike.
Coles claims innocence, saying that these allegations related to a period of "significant cost inflation" when it was receiving a large number of cost price increases from suppliers. At the same time, Coles' own costs were rising, which led to an increase in the product price. The supermarket company explained:
Coles sought to strike an appropriate balance between managing the impact of cost price increases on retail prices and offering value to customers through the recommencement of promotional activity as soon as possible after the establishment of the new non-promotional price.
Time will tell whether the ACCC is successful with its action, and it's possible there will be a large fine. Coles could also successfully defend itself. But even if there is a fine, this seems like an important but one-off issue that will fade into history once it's settled.
I don't believe that Coles shares' future underlying value has been permanently decreased by 7% by these investigations.
Why I'm confident about Coles shares
The supermarket giant is benefiting from a number of tailwinds, including a rising population and increasing digitalisation.
A bigger Australian population should help increase the number of shoppers across its supermarkets and lead to revenue growth.
Coles is doing a good job of serving customers in a variety of ways, with e-commerce sales soaring. In FY24, Coles reported that its e-commerce sales grew by 30.1% in its supermarkets business and 9.2% in liquor on a normalised basis.
The main thing I want to see is earnings growth. In the longer term, I think the company's investments in its automated distribution centres will help improve efficiencies and margins.
Broker UBS currently estimates Coles could generate net profit of $1.16 billion in FY25 and $1.42 billion by FY27, which suggests profit could go up 22% over that two-year period. I think this could be a good support for its underlying value in the next few years.
Coles shares are better value after its decline, and the passive income could also be appealing. According to UBS, Coles could pay a grossed-up (including franking credits) dividend yield of 5.8% in FY25 and then annual growth in the next few years, but that's not guaranteed.
