Coles shares underperformed the market last month. What's next?

It's not all doom and gloom for Coles. Let's take a look…

| More on:
A woman ponders over what to buy as she looks at the shelves of a supermarket.

Image source: Getty Images

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

Key points

  • October was a great month for many ASX 200 shares
  • But Coles Group wasn't one of them, as it underperformed the broader market
  • However, one broker remains bullish on the grocery giant

Although it is turning out to be a pretty disappointing day for ASX shares today, we mustn't forget that the S&P/ASX 200 Index (ASX: XJO) had a top month last month. Over October, the ASX 200 gained a healthy 6%. But sadly, the same can't be said for Coles Group Ltd (ASX: COL) shares.

Coles had a fairly miserable month of October. The ASX 200 grocery giant started the month at $16.43 a share. But the Coles share price ended up at $16.33 by the end. That's a slide of 0.61%, and an unhappy underperformance of the markets of 5.39%.

So why were Coles shares so shunned over October? The supermarket operator seemed to miss out on all of that goodwill from investors.

Well, one of the primary catalysts appeared to be the first quarter update that Coles delivered late into the month.

The company reported a 1.3% increase in group sales over the three months to September 30. Supermarket sales rose by 1.6% and express sales by 8.4%. However, liquor sales declined by 4.3%.

As we covered at the time, some investors were expecting more, so the markets seemed disappointed with these numbers.

Coles' management also flagged that the company is "not immune to the inflationary cost pressures", so that probably didn't help investors' confidence either. That was despite the company banking price inflation of 7.1% compared to 4.3% in the previous quarter.

The release of this update saw the Coles share price drop around 3% on the day, ensuring that Coles shares stayed in the red for October.

So what now for Coles shares?

After this disappointing month, many investors might be wondering what's next for the Coles share price?

Well, at least one expert is still bullish on the company.

As my Fool colleague James reported last week, ASX broker Morgans is one expert eyeing off Coles at the current levels. The broker has recently put out an add rating on the company, complete with a 12-month share price target of $19.50.

If realised, that would give investors an upside of more than 20% from the current level. Here's some of what Morgans had to say:

Trading on 20.6x FY23F PE [price-to-earnings ratio) and 4.0% yield, we continue to see COL as offering good value with the company's solid balance sheet and defensive characteristics putting it in a good position to navigate through a weaker economic environment. The unwinding of local shopping should also help further market share gains.

Morgans is also expecting the company to keep raising its dividend. It anticipates dividend payments of 64 cents per share for FY 2023 and 66 cents per share for FY 2024.

No doubt investors will be overjoyed to hear this optimistic tone from this ASX broker. But we'll have to wait and see what the next 12 months have in store for Coles shares.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Consumer Staples & Discretionary Shares

Happy friends at a party enjoying pizza, symbolising the Domino's share price.
Broker Notes

Buy, hold, or sell Domino's Pizza shares after shock CEO exit? Here's what the experts say

The Domino's share price has been recovering after losing a quarter of its value last Wednesday.

Read more »

Photo of a happy couple with their car and car keys.
Consumer Staples & Discretionary Shares

What are Macquarie's top ASX All Ords picks in the automotive sector?

Aussie investors are becoming increasingly interested in auto stocks.

Read more »

basket of grocery items with smart phone ordering system
Consumer Staples & Discretionary Shares

Here's how Aldi plans to disrupt Coles and Woolworths with online shopping

Here’s Aldi’s latest move to try to win market share.

Read more »

Two male professional analysts discuss share price movements shown on the computer screen in front of them, with one pointing to a screen
Consumer Staples & Discretionary Shares

Broker tips 40-52% upside for these ASX consumer staples shares

This broker is tipping a big year ahead for these ASX shares.

Read more »

Happy couple doing online shopping.
Consumer Staples & Discretionary Shares

Consumer dicretionary picks: what's Macquarie's price targets for Nick Scali and Harvey Norman shares?

This broker has a clear favourite.

Read more »

Woman presenting financial report on large screen in conference room.
Consumer Staples & Discretionary Shares

Why this consumer share is up 10% on earnings guidance

This company’s shareholders have seen their holdings gain 46% in a year.

Read more »

A man and a woman line up to race through a supermarket,.
Consumer Staples & Discretionary Shares

Supermarket battle: Does Macquarie see more upside for Woolworths or Coles shares?

Which stock should investors put in their shopping basket?

Read more »

Happy couple doing online shopping.
Consumer Staples & Discretionary Shares

Furniture battle: Does Macquarie prefer Nick Scali or Temple & Webster shares?

Let's see which one the broker is recommending to clients.

Read more »