Supermarket giants Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) shares are popular investments among ASX investors.
Supermarkets are considered defensive businesses that perform relatively well during market volatility.
Due to the essential nature of their products, they can produce a reliable cash flow.
Australia's two major supermarkets, Coles and Woolworths, are considered safe havens during a downturn. When the market looks expensive, many investors may reposition their portfolios to include more defensive stocks to mitigate downside risk.
The S&P/ASX 200 Index (ASX: XJO) is currently trading at a price-to-earnings (PE) multiple of around 20. According to Commsec, this is significantly above its long-term average of 15. Accordingly, there may be heightened interest in these two companies.
Coles has outperformed Woolworths by a wide margin over the past year. It has risen 17% compared to Woolworths' 10% decline.
But what do future returns look like?
One leading expert recently revised its rating for both companies. Let's see what they had to say.
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JP Morgan upgrades major supermarkets
In a 16 July research note, JP Morgan Chase & Co (NYSE: JPM) upgraded both Coles and Woolworths shares from underweight to neutral. The broker said both companies were fairly valued at today's share prices.
In that research note, JP Morgan compared like-for-like sales growth with minimum wage growth. The broker noted that the former was lagging the latter.
According to JP Morgan, the supermarkets were delivering sales growth of ~1%, which is less than half pre-COVID levels of around 2-2.5%. This was attributed to the composition of sales growth shifting towards online, which has cannibalised bricks and mortar stores.
Costco and Aldi recently made a play to capture online market share. However, JP Morgan does not consider this a material threat, commenting:
The online channel has been seen as a source of incremental market share, given the narrow competitor set and even more pronounced scale advantages for Woolworths and Coles. We do not see these advantages eroding, despite online aggregators pushing into this category, as DoorDash partners with Aldi and Costco.
More notably, there has been around 4% wage growth inflation, and the Fair Work Commission is attempting to restore real wages (above the inflation rate) in the coming years. The broker suggested this could add more pressure.
The broker also suggested that the supermarket giants would "likely pull the gross margin levers once again" to offset these headwinds but questioned the sustainability of this strategy.
JP Morgan has placed a price target of $31 on Woolworths shares and $20 on Coles shares.
The broker's price target for Coles implies a 1-year forward P/E multiple of 19.7x, representing a 7% discount on Woolworths shares.
On Friday, Woolworths shares closed at $31.51, while Coles shares closed at $20.59. This suggests that Woolworths shares could decline 2% while Coles shares could fall 3%.
Therefore, JP Morgan believes Woolworths shares will perform better than Coles from here over the next 12 months, but only by a fraction.
Earnings season preview
Those looking to invest in either Coles or Woolworths should pay close attention to their upcoming earnings results. Any material changes from market expectations or surprises could impact their share prices.
Coles is scheduled to report its FY25 results on 26 August.
JP Morgan expects group EBIT of $2,068m and NPAT of $1,089m, which is broadly in line with Bloomberg consensus. The broker will be focused on the FY26 outlook, where its current forecast is 3.8% below consensus earnings before interest and tax (EBIT) and earnings per share (EPS).
Woolworths will report the following day, on 27 August.
JP Morgan expects group EBIT of $2,791m and NPAT of $1,383m, which also falls roughly in line with Bloomberg consensus. Once again, the broker will be paying attention to the FY26 outlook. JP Morgan's forecast is 4.0% below consensus on FY26 EBIT and 5.5% below consensus on FY26 EPS.
