Could Woolworths Limited (ASX: WOW) turn the corner faster than what the market is pricing into the stock at a time when arch-rival Coles is slipping behind?
It's almost unthinkable as Wesfarmers Ltd's (ASX: WES) Coles business has been a consistent outperformer over the past few years – particularly given Woolworths' disastrous foray into hardware retailing.
But some fresh evidence is emerging to support this view with the stock jumping 1.3% to $25.54 in late morning trade after UBS released its findings from a "Supermarket Supplier" survey, which draws on respondents from the FMCG market who rated Woolworths and Coles on 26 issues.
The broker claims that its survey has been an accurate leading indicator on the performance of the two supermarket giants and this latest survey has recorded material improvement at Woolies across all 26 questions.
What is perhaps even more significant is that Woolies' scores have beaten Coles for the first time since August 2012!
Investors shouldn't be too surprised that Woolies is showing improvements given it has thrown more than $1.5 billion in the last two financial years to turnaround its struggling operations, but UBS is surprised by the speed and magnitude of the improvement.
The most notable improvements were in "morale", "pricing strategy" and "promotional effectiveness".
This means sales at Woolies are going to be stronger for longer and that the growth momentum will accelerate until Q4 2018, according to UBS, which has a higher than consensus earnings forecast for Woolworths.
Shareholders in Wesfarmers better be paying attention too.
The broker said its survey indicated a potential downturn in Coles, which puts the stock at risk of missing consensus forecasts. This is why UBS is recommending investors buy Woolworths and has a neutral rating on Wesfarmers.
This development follows last week's pleasing profit update from Metcash Limited (ASX: MTS), which I think represents a lower risk profile as Metcash doesn't need to grow its grocery division to sustain its profit momentum.
The grocery/supermarket sector is pretty much a zero sum game with incumbents facing aggressive competition and powerful off or online rivals like Aldi and Amazon.
There are better opportunities worth considering in the market. See below to find out what the experts at The Motley Fool have uncovered.
