The Coles Group Ltd (ASX: COL) share price could still be undervalued despite rising more than 10% in 2023 to date, more than doubling the S&P/ASX 200 Index (ASX: XJO) return of around 4%.
Outperformance is good, but I think there's potential for more good returns over the rest of the year. So, let's get into why it could continue doing well.
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Ongoing sales growth
Investors can be heavily focused on what's happening with a company's net profit after tax (NPAT). Revenue growth is often a key driver of NPAT – it's the top of the financial funnel, but having a bigger scale can also help the business achieve stronger margins.
In the first half of FY23, we saw its continuing operations (excluding Express) sales grow by 3.9% to $20.8 billion, earnings before interest and tax (EBIT) increase by 9.9% to $1.06 billion and 11.4% growth of NPAT to $616 million.
The third quarter of FY23 revealed a 6.6% rise of continuing operations sales, meaning that sales revenue growth had accelerated.
There was 6.2% inflation in the third quarter of FY23. At the start of the fourth quarter, it revealed that supermarket sales growth "continued" with volumes remaining "modestly positive", while supplier input cost inflation was also expected to "continue to moderate", but that could suggest that inflation is continuing.
If sales (and inflation) grow more than expected, this could be an ongoing tailwind for the Coles share price.
Coles share price cheaper than the competition
I think it's fair that some businesses in a sector trade on a higher earnings multiple than others if they are higher quality. But, if both businesses in the industry deliver similar sales and profit growth, then that could make the cheaper one better value and a better pick.
According to Commsec, the Coles share price is valued at 22 times FY24's estimated earnings and under 20 times FY25's estimated earnings.
Woolworths Group Ltd (ASX: WOW) shares are currently valued at 25 times FY24's estimated earnings and more than 23 times FY25's estimated earnings.
Both businesses could do well over the rest of the year, but it could be the better choice to go for the cheaper of the two, as it could also lead to a stronger dividend yield.
Strong dividends
Coles has been steadily growing its dividend since 2019 and the dividend could keep growing.
Shareholders enjoy getting an increased cash payout, which could be a natural boost for the Coles share price, even if NPAT doesn't grow that much.
In FY23 it could pay an annual dividend share of 66 cents, according to Commsec, which would represent a grossed-up dividend yield of 5.2%.
In FY24 it could pay a grossed-up dividend yield of 5.3% and then in FY25 it might pay a grossed-up dividend yield of 5.9%.
Investors may push the Coles share price higher if they see that the dividend continues to grow and the yield is solid.
