The Coles Group Ltd (ASX: COL) share price has returned to form on Thursday and is trading higher.
At the time of writing the supermarket operator's shares are up 1.5% to $15.75.
Should you buy Coles shares?
I was very impressed with Coles' performance during the third quarter. It recorded quarterly sales revenue of $9.2 billion, which was an increase of 12.9% on the prior corresponding period.
This was driven by panic buying in its supermarkets and strong alcohol sales due to the closure of pubs, bars, restaurants, and clubs following the introduction of social distancing measures.
The only thing to take the shine off the result was news that its cost base will be higher in the fourth quarter. This follows a number of coronavirus-related measures such as higher remuneration because of increasing staff numbers, investments in cleaning, security, and queuing systems, and the absorption of cost price pressures.
This has led to a touch of uncertainty in regard to what its full year result will look like in August.
But one broker that remains positive is Goldman Sachs. According to a note this morning, its analysts have retained their conviction buy rating on its shares and trimmed the price target on them by 10 cents to $18.60.
This implies potential upside of approximately 18% excluding dividends and 22% including them.
What did Goldman Sachs say about Coles?
Commenting on the update, Goldman Sachs said: "COL reported 3Q20 sales with +13.1% comps in Food, +7.2% comps in Liquor, while Convenience sales were modestly below expectations."
"As per global supermarket updates, cost increases associated with COVID (such as cleaning, social distancing controls and security) are mitigating much of the operating leverage, but risk remains to upside for margin expansion, in our view."
"Sales trends into 4Q20 are at lower growth rates than 3Q20, but remain well above normal growth rates for both Food and Liquor," it added.
It expects Coles to report a full year profit of $961 million, with earnings per share of 72 cents. This is then expected to increase to $1,023 million and 77 cents per share, respectively, in FY 2021.
In light of this, Goldman expects a 59 cents per share fully franked dividend in FY 2020 and then a 65 cents per share dividend in FY 2021.
Based on these estimates, Coles shares are changing hands at 20x FY 2021 earnings and offering a 4.1% forward yield. I believe this is good value and would agree that it is a top share to buy right now.
Furthermore, on valuation grounds, I would choose it ahead of rival Woolworths Group Ltd (ASX: WOW), which has just handed in its third quarter update this morning.
