This morning analysts at Goldman Sachs released a note with their appraisal of the Australian supermarket industry and Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW).
What did Goldman Sachs say?
The broker notes that things have changed greatly in the industry since the onset of the pandemic.
Goldman commented: "Since then the industry outlook has drastically changed due to: Consumption habits shifting towards home consumption due to temporary closure of restaurants, social distancing requirements and the virus scare in general; Travel restrictions, particularly overseas travel, leading to a potential shift in tourism spending and a slowdown in the Australian resident population growth and; a changed macro environment with recessionary conditions expected in the short term."
The broker was expecting industry growth of 4.5% per year over the medium term. This comprised inflation of +2.5% and volume growth of +2%.
However, it has now revised its forecasts lower largely because of a slowdown in population growth due to lower overseas migration.
Its analysts explained: "We expect industry growth in FY21 to be constrained to 2.4% vs. 10 year average of +3.8%. If sustained, slower population growth (migration) could detract from FY22 growth as well."
Should you buy Coles or Woolworths?
Despite downgrading its industry growth forecasts, Goldman Sachs remains very positive on Coles.
Its analysts have retained their conviction buy rating with a slightly reduced price target of $18.50. This implies a potential return of 9.5% over the next 12 months without dividends and approximately 13.3% including them.
The broker is a little less positive on Woolworths for valuation reasons. It has retained its neutral rating and has a $36.80 price target on the company's shares. This compares to its last close price of $36.90.
While I think that both companies are arguably in the buy zone, I would have to agree that Coles is the better option of the two. I feel its shares offer a compelling risk/reward at the current level.
