The real winner from Coles Group's profit upgrade

If you are wondering why the Coles Group Ltd (ASX: COL) share price fell after posting a profit upgrade while its ex-mothership Wesfarmers Ltd (ASX: WES) rallied, there could be a method to the madness.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you are wondering why the Coles Group Ltd (ASX: COL) share price fell after posting a profit upgrade while its ex-mothership Wesfarmers Ltd (ASX: WES) rallied, there could be a method to the madness.

Shares in the supermarket chain returned all its gains in early trade on Thursday to end 0.1% lower at $16.63 while the Wesfarmers share price jumped 1.4% to $45.55.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index added 1% in value yesterday.

Why Coles' shares dipped

Some might think that the risk-on sentiment on global markets may have contributed to the weakness in Coles given that stocks like that are seen as defensive, but that won't explain the 0.8% rally in the Woolworths Group Ltd (ASX: WOW) share price.

The thing is, Coles' better than expected performance is only a little better than what the market was expecting and it won't quell concerns that the stock has run ahead of fundamentals. The Coles share price increased by a very pleasing 36% over the past year.

Another reason is that the market may be anticipating a large amount of Coles stock to come onto the market from Wesfarmers.

Sell down coming?

The conglomerate divested Coles into a November 2018 but still holds a 15% stake in the supermarket.

There's speculation that Wesfarmers may be looking to sell part of its holdings to capitalise on Coles' strong share price run.

The timing of Coles' bullish update is feeding the conspiracy theorists, according to the Australian Financial Review.

Some are questioning why the supermarket is issuing the good news so close to its results and if the announcement was even needed given that the underlying earnings before interest and tax (EBIT) wasn't much above consensus.

Eager seller

Wesfarmers needs to maintain at least a 9% holding in Coles to keep its board seat, but that still leaves it with a lot of stock it can sell.

The sale is likely to be an off-market trade to minimise any direct pressure on the Coles share price, but that won't mean the stock won't fall.

To get the "cross" over the line, it would be my guess that Wesfarmers will need to offer up its stake at a discount to the current share price unless it finds an eager buyer. But since no one could consider Coles a bargain, I think selling stock at or above the market price would be tough.

If the stock is offered at a discount, it is more likely than not that Coles' share price will dip towards the offered price (as this typically happens). Wesfarmers, on the other hand, will be smiling all the way to the bank.

It's easy to see who's on the winning side of the Coles' upgrade.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of Wesfarmers Limited. 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.

More on Share Market News

A golfer celebrates a good shot at the tee, indicating success.
Share Market News

Here are the top 10 ASX 200 shares today

ASX investors finally enjoyed a win this Thursday...

Read more »

a man sits back from his laptop computer with both hands behind his head feeling happy to see the Brambles share price moving significantly higher today
Industrials Shares

Up 39% in a year, is there more growth to come for this ASX 200 share?

IML Equity Analyst Josh Freiman shares his views on a major ASX 200 industrial stock.

Read more »

Man looking at his grocery receipt, symbolising inflation.
Share Market News

What the latest US inflation print means for ASX 200 investors

The ASX 200 is likely to benefit if the US Fed cuts interest rates again in December. But will it?

Read more »

guy helping girl invest in shares and dividends
Opinions

5 ways for investors buying ASX shares to stay focused during economic uncertainty

AMP Chief Economist, Dr Shane Oliver, offers advice on how to handle the Trump factor.

Read more »

A worried man holds his head and look at his computer.
Share Fallers

Why Graincorp, Light & Wonder, Orica, and Wildcat shares are falling today

These shares are having a tough time on Thursday. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Catapult, Flight Centre, Nufarm, and Xero shares are storming higher today

These shares are having a strong session on Thursday. But why? Let's find out.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Opinions

1 ASX growth stock down 30% I'd buy right now

This international business is growing core earnings at a strong rate.

Read more »

Concept image of a man in a suit with his chest on fire.
Record Highs

How long can the CBA share price keep this up?

Australia's biggest bank is running hot. Does it make any sense?

Read more »