Coles share price drops lower following broker downgrade

The Coles Group Ltd (ASX:COL) share price is trading lower on Friday after being downgraded by Goldman Sachs…

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The Coles Group Ltd (ASX: COL) share price is trading in the red on Friday.

In morning trade the supermarket operator's shares fell 1.5% to $15.48.

Why is the Coles share price trading lower today?

Investors have been selling the company's shares on Friday after analysts at Goldman Sachs downgraded them.

According to a note out of the investment bank, its analysts have downgraded the supermarket operator's shares to a neutral rating from buy and held firm with their $15.90 price target.

The broker made the move on valuation grounds after a strong share price gain in 2019.

Earlier this week the Coles share price hit a 52-week high of $15.79. When its shares reached that level, it meant they had gained an impressive 35% since the start of the year.

In light of this, and as there is limited upside potential for its shares based on its current price target, the broker decided to downgrade its shares today.

Goldman Sachs explained: "While we continue to believe in the validity of the cost out strategy and expectations of an improved momentum in Coles, the key catalyst to watch out for in terms of further acceleration in our opinion is evidence of the in-store execution which continued to lag vs. its key competitor in the recent past. Pending this, the stock now prices in our short-term expectations, and we downgrade our rating to Neutral (from Buy)."

Goldman expects Coles to generate earnings per share of 68 cents in FY 2020 and then 74 cents in FY 2021. This means its shares are currently changing hands at 23x estimated FY 2020 earnings and 21.5x estimated FY 2021 earnings.

Incidentally, the broker also has a neutral rating on arch rival Woolworths Group Ltd (ASX: WOW). It has a $35.40 price target on its shares, noting that its "share price looks stretched versus global peers and its historical P/E range."

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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