Shares in Coles Group Ltd (ASX: COL) have been very lucrative for investors to hold over this year so far. COL shares hit the share markets for the first time as an independent company in November last year for around $12.70 per share after being spun-out of its old parent company Wesfarmers Ltd (ASX: WES).
Since that time, it's been nothing but up for Coles with COL shares now commanding a price tag of $16.34 – a YTD gain of nearly 40%.
But where to for Coles shares now? Well, I've thought of a two-case scenario of where I see Coles shares going from here.
Here's my Bullish and Bearish theses.
Bullish
Coles shares are currently being valued for around 20 times the company's earnings. For some perspective, Coles' arch-rival Woolworths Group Ltd (ASX: WOW) is currently valued at around 35 times its earnings.
If Coles can continue to successfully implement its Smarter Selling cost cutting program, whilst also continuing to book revenue growth, it will be well placed to increase its earnings per share as well as its dividend.
If all these ducks line up, I can see Coles's share price moving towards the earnings multiple that Woolworths current trades at, which implies an upside of up to 75%.
Bearish
On the other hand, we might only see limited growth for Coles from here if things don't go its way. For one, Coles seems to have less brand loyalty than both of its rivals in Woolworths and Aldi.
Just take a look at this graph below:
Source: ABC News
Although we don't yet have numbers for 2019, we can clearly see that Woolworths has been able to maintain and even increase its share of the Aussie grocery market in the face of competition from Aldi and Metcash Limited (ASX: MTS)'s IGA stores.
Coles on the other hand has bled market share to its rivals – implying that the brands or pricing 'moats' around its business aren't as strong as Woolies'.
If this trend continues, it's unlikely Coles will be able to continue to grow revenues and if its Smarter Selling plans go awry, its dividend might even come under pressure. If any part of this scenario plays out, it would not be good news for the Coles share price.
Foolish takeaway
I can see things going either way from here for Coles. I like the changes that Coles management have been making in the business, but for me, the jury's still out on whether I would like to pick up COL shares for myself. I'd like to wait and see if the company can successfully hold its own against its competitors before opening a position.
