Is the Coles Group Limited (ASX: COL) share price a buy?
Over the past month investors have definitely said yes to that question. With the share price rising from around $11.50 to $12.50.
Coles is an interesting business to consider. I believed it was going to be weaker outside of the Wesfarmers Ltd (ASX: WES) stable, but it has also been given the impetus to do the things it needs to do to take the next step.
For example, it sold the economic rights to its hotels business because management judged that the industry was not Coles' speciality whilst also providing its liquor business the expansion partner it needed to keep growing in Queensland.
I also like that Coles has signed a deal with Ocado, a world leader in online grocery deliveries, to optimise the usage of the upcoming automated distribution warehouses.
For many years Coles had been outperforming Woolworths Group Ltd (ASX: WOW) in terms of sales growth but it's now Coles that has to prove itself again.
Price cuts aren't the only answer, as effective as the "Down down" campaign was in the past. Aldi, Costco and possible new market entrants like Kaufland have cheaper operating models and large global networks.
To win the supermarket wars I think Coles would have to do something very different to the rest.
Whilst Coles is a good business, I think it's operating in a structurally challenged sector where competitors like Aldi and Amazon would be fine if the sector's profit margins were to contract further.
Coles is currently trading at 19x FY20's estimated earnings. I don't think this is a good price for buyers today.
