They say the cream rises to the top and that was certainly the case yesterday when looking at the Woolworths (WOW) result and subsequent reaction versus Coles (COL) the prior day. The cost and margin pressures that are evident at Coles were not obvious for Woolworths as years of investment in digital engagement, e-commerce, logistics & fulfilment, things like electronic shelf labelling and far better smarts around data and promotional effectiveness are paying dividends, and driving better margins and therefore better earnings.
The primary criticism of Wesfarmers (WES) when they owned Coles, was a lack of investment and that is now being exposed. Most analysts see Coles as the better option given a more attractive valuation (COL on a P/E of 20.4x versus WOW on a P/E of 24.4x), however, it is clear they are cheaper for a reason and the respective results this week have shown why. While EBIT margins at COL are declining, margin expansion is tipped at WOW in FY24 and that supports a higher valuation, all be it, it’s too high for MM trading on a ~15% premium to the ASX 200 Industrials.
- A solid result from WOW yesterday solidifies its spot as the highest quality Consumer Staples stock on the market, although it’s being priced accordingly.
MM is neutral WOW ~$37.50, valuation is our only concern
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