Coles Group Ltd (ASX: COL) shares have been having a volatile year with plenty of ups and downs.
But according to one leading broker, it could be onwards and upwards from here.
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What is the broker saying about Coles shares?
According to a note out of Ord Minnett, its analysts believe that the supermarket and liquor giant could be a top option for investors following its recent quarterly update.
The broker highlights that Coles delivered a solid update, which demonstrated strong execution and clear cost discipline. It feels that this bodes well for the future. Its analysts said:
Coles provided a solid update for the September quarter. The company demonstrated strong execution with healthy first-quarter FY25 sales and clear cost discipline. Secondly, tightly managed capital expenditure (capex) should reward shareholders with healthy free cash flow (FCF) and dividends.
Ord Minnett is also feeling positive about the future due to several earnings drivers. But despite this positive outlook, it notes that its shares trade at a sizeable discount to rival Woolworths Group Ltd (ASX: WOW). It adds:
Beyond FY25, Coles has several earnings drivers in FY26, underpinning our confidence in earnings growth. The risk-reward is attractive, with Coles now trading at a 16% discount to arch-rival Woolworths (WOW).
And while there are a number of risks to be wary of, such as regulatory scrutiny and negative media coverage, the broker highlights that it has been business as usual inside its supermarkets. It explains:
Coles is navigating a challenging period for Australian supermarkets, managing government and regulatory scrutiny, deflation, and cost pressures effectively. The group's strategy to focus on its core food business while maintaining cost control is proving successful. Coles has not seen significant changes in consumer behaviour around promotions or promotional funding, and its promotional strategy is improving consumer value perceptions.
Shares upgraded
Overall, Ord Minnett remains very positive on the company's future and thinks it would be a good option for investors right now. This saw it recently upgrade Coles shares from a hold rating to an accumulate rating with an improved price target of $19.50.
Based on its current share price of $18.16, this implies potential upside of 7.4% for investors over the next 12 months. And including dividends, the total return stretches beyond 11%. The broker concludes:
Coles should have considerable savings to invest for growth in FY26, supporting profit delivery and market share gains. We have lowered our food gross margin forecasts for FY25 and raised our depreciation and amortisation estimates, which has resulted in an approximately 5% reduction in our full-year EPS forecast. We have moved our recommendation to Accumulate from Hold and our price target has increased to $19.50 from $19.00.
