Woolworths Group Ltd (ASX: WOW) shares have done well in 2023 to date, rising by over 17%. But one fund manager now thinks there's a better opportunity to be found with a different S&P/ASX 200 Index (ASX: XJO) stock – Metcash Ltd (ASX: MTS) shares.
Woolworths is best known as a supermarket company, but it also supplies food to other businesses, it owns Big W and it owns a majority of the company that operates PETstock.
Metcash is a little different, but it's also a similar business. It supplies IGA supermarkets around Australia as well as independent liquor retailers like IGA Liquor, Bottle-O, Cellarbrations and Porters Liquor. Finally, it owns hardware brands Mitre 10, Home Timber & Hardware and Total Tools.
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Is something going wrong for Woolworths shares?
According to reporting by the Australian Financial Review, portfolio manager Anthony Kavanagh from Chester Asset Management believes that on an "overall level", supermarkets "continue to generate mid-single digit topline growth of around 5%".
Chester Asset Management thinks that Woolworths is outperforming other supermarkets except Aldi.
In the latest quarterly update from Woolworths, being the 13 weeks to 2 April 2023, it said that total sales were up 8% to $16.3 billion, while Australian supermarket sales were up 7.6% to $12.3 billion.
Woolworths also said in that update that in the fourth quarter to date (meaning the month of April), the sales trend had been in line with the third quarter with "solid sales growth" in its food businesses.
Why did Chester Asset Management change to Metcash shares
The reason for the investment change to the ASX 200 stock was that the "relative value of Metcash versus Woolworths just got too wide."
Kavanagh acknowledged that some IGA stores may be losing some market share to larger stores and that the trade/home hardware volumes are softening.
What the fund manager likes about Metcash shares is that its valuation is "appealing" for the relative stability of its cash flows.
Chester Asset Management suggested that the Metcash share price is valued at 12 times FY24's earnings with a 5.9% dividend yield.
He compared those numbers to the Woolworths share price valuation being on a price/earnings (P/E) ratio of 25 times and a 2.9% dividend yield. Kavanagh said that Woolworths shares are defensive but expensive.
Latest trading update from the ASX 200 stock
In the first seven weeks of FY24, all pillars were "continuing to perform well" according to Metcash, with group sales up 2.3%.
In the food segment, total sales were up 6.8% excluding tobacco, or up 2% including tobacco.
In the hardware division, total sales were up 5% because of "continued solid underlying demand" and the contribution from acquisitions. Total sales were up 19.9%.
In liquor, total sales were up 1.2%, with some patrons spending less.
Metcash share price snapshot
Despite the ongoing sales growth of the business, the Metcash share price is down 13% in the last six months, as we can see on the chart below.
