Is the Coles Group Limited (ASX: COL) share price a buy?
The Coles share price has gone up over almost 30% the past six months, which is very impressive for a slow-growth business like a supermarket.
The market seems to like Coles' plan of divesting the economic rights to its hotels business and it continues to do decently with its supermarkets.
Coles supermarket comparable sales grew by 2.7% in FY19 and the earnings before interest and tax (EBIT) rose by 2.2%. The Coles board declared a total dividend of 35.5 cents per share comprising an ordinary final dividend of 24 cents per share and a special dividend of 11.5 cents per share. It was a solid start to separate listed life away from Wesfarmers Ltd (ASX: WES).
Coles Little Shop has been a hit with shoppers and I like the plan to aim to be the most sustainable supermarket with good-quality healthy private label products.
A recovery in Coles Express could also be welcome with a new deal with Viva Energy Group Ltd (ASX: VEA), but volumes are still expected to be lower than ideal in FY20.
The thing I like the most about Coles is that it's investing heavily in technology and partnerships to be as efficient as it can.
Foolish takeaway
For me there are two reasons why I don't want to invest in Coles shares today.
The first is the growing amount of competition. Woolworths Group Ltd (ASX: WOW) is always there, Aldi's national footprint continues to grow, Costco is slowly expanding and soon Kaufland will be opening its first stores. Prices could come under more pressure if Coles wants to protect its market share.
With the above in mind, it's Coles' valuation that really puts me off. At 23x FY20's estimated earnings it doesn't seem great value for how slow its growth will be – yet it has plenty of competition. I think a decent price to buy shares would be around 17x earnings (or lower).
