Coles vs Woolworths: Which ASX share to buy right now?

Next week both Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) are scheduled to release their respective third quarter updates.

© Provided by The Motley Fool
Woolworths share price

Expectations certainly are high for both updates after the coronavirus pandemic sparked frenzied buying of supermarket and alcohol goods.

Ahead of these releases, I thought I would take a look at what the market was expecting from the two retail giants and whether there were investment opportunities here.

Coles.

According to a note out of Goldman Sachs, it expects Coles to deliver a whopping 12% increase in comparable store sales growth in its Food division and a 6% lift in the Liquor division. This is expected to be driven by stockpiling by consumers, more eating at home, and a 1.2% lift in food inflation.

The broker ultimately expects this to lead to Coles reporting third quarter group sales growth of 12.1% to $9,163 million. This comprises Food sales of $8,148.5 million, Liquor sales or $758.1 million, and Convenience sales of $256.8 million.  

Looking further ahead, for the full year the broker has pencilled in sales of $37,192 million, net profit after tax of $988 million, and a dividend of 62 cents per share.

Woolworths.

For Woolworths, the broker expects the company to also report a 12% increase in comparable Food sales and a 6% lift in its Endeavour Drinks (Liquor) sales. Goldman is also predicting a 12% jump in comparable sales for its New Zealand supermarkets and a 2% increase in underlying comparable sales for the Big W business.

Combined, Goldman Sachs has forecast Woolworths delivering a 10.2% increase in total third quarter sales to $16,423 million. This comprises Australian Food sales of $11,251 million, Endeavour Drinks sales of $2.219 million, NZ Supermarket sales of A$1,779 million, Big W sales of $791 million, and Hotel sales of $383 million.

Which share should you buy?

I think that Coles is the better option of the two for valuation and yield reasons.

At present, its shares are changing hands at 20x estimated FY 2021 earnings and offer a forward 3.9% fully franked dividend yield.

Whereas Woolworths’ shares are trading at 24x estimated FY 2021 earnings and offer a forward fully franked 3% dividend yield.

Goldman Sachs appears to agree. It has a conviction buy rating and $18.70 price target on Coles shares. For Woolworths, it has a neutral rating and $37.30 price target on its shares.