In morning trade the Coles Group Ltd (ASX: COL) share price is pushing higher.
At the time of writing, the supermarket giant's shares are up 2% to $15.80.
This means the Coles share price has now limited its year-to-date decline to just under 15%.
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Is the Coles share price in the buy zone?
According to a note out of Goldman Sachs, its analysts believe the recent weakness in the Coles share price is a buying opportunity for investors.
This morning the broker reaffirmed its buy rating and $20.70 price target on the company's shares.
Based on the current Coles share price, this price target implies potential upside of 31% over the next 12 months. And if you include dividends, this stretches to approximately 35%.
What did Goldman say about Coles?
There are a few reasons that Goldman Sachs is positive on the company. One of those is its smarter selling program. It commented:
"The smarter selling cost out program continues to be in important medium-term support to earnings with another A$250mn in gross cost out forecast by management in FY21. Although there is some concern in the market around the lower sales trends at COL leading to a potential price war, we see the cost out as a key differentiator in margin performance ahead of some longer-term efficiency programs."
And while Coles is underperforming rival Woolworths Group Ltd (ASX: WOW), Goldman appears optimistic that this gap will narrow in FY 2022.
"COL has underperformed WOW from a comparable store sales perspective by ~1.8% over the last three quarters. After adjusting for the divergent start in 3Q20 and store rollout, this growth differential persisted into 3Q21. WOW's superior execution and stronger online focus is delivering consistent above market sales performance, however we expect this relativity to converge over FY22 as smarter selling initiatives deliver improvements in execution."
Looking long term, the broker believes that Coles is well-placed to benefit from the automation of its supply chain.
"The key long-term theme for COL is the step change in efficiency the company will derive as it automates its supply chain with the Witron installations starting in SEQ and NSW. While this program will not begin to impact performance until FY24, management appear to be getting more confident about the benefits to longer-term competitiveness."
Overall, with its shares trading at 20x estimated FY 2021 earnings, it sees a lot of value in them at the current level.
