Coles Group stock price target raised to AUD25.00 by UBS on strong sales

UBS has increased its price target for Coles Group Ltd. (ASX:COL) to AUD25.00 from AUD23.50, reiterating a Buy rating, following the Australian supermarket chain's strong FY25 results which saw 3.6% sales growth and 6.8% underlying EBIT growth, alongside robust cash realization. This positive outlook is primarily driven by the Supermarkets division's performance amid an improving industry backdrop. However, UBS adjusted its FY26 and FY27 EPS estimates slightly downward, citing lower expected Liquor EBIT and higher costs, while Coles' FY26 capital expenditure guidance also came in below UBS's previous forecast. The company currently trades near its 52-week high with a 27.9x P/E, deemed fairly valued by InvestingPro.

Analysis

UBS has reiterated its Buy rating on Coles Group Ltd. (ASX:COL) and raised its price target to AUD25.00, signaling confidence despite some underlying concerns. The positive revision is anchored in strong fiscal year 2025 results, which featured 3.6% sales growth, 6.8% underlying EBIT growth, and robust 102% cash realization. This performance is primarily driven by the Supermarkets division, which saw sales increase by 4.9% in the first eight weeks of the current period, benefiting from strong execution and an improving industry backdrop. However, this strength is partially offset by notable headwinds. UBS has lowered its reported EPS estimates for FY26 and FY27 by 3.2% and 1.3% respectively, citing weakness in the Liquor division, where sales were flat, and an expectation of higher costs. Furthermore, the company's FY26 capital expenditure guidance of AUD1.2 billion came in below UBS's prior estimate. At a P/E ratio of 27.9x and trading near its 52-week high, the stock is considered fairly valued, suggesting the positive operational news may already be priced in.

Key Decisions for Investors

• Investors should weigh the strong performance and positive outlook for the core Supermarkets division against the flagged weaknesses, such as flat Liquor sales and downward EPS revisions for FY26-27.
• Given the stock is trading near its 52-week high and is considered fairly valued at a 27.9x P/E ratio, prospective investors might consider waiting for a more attractive entry point, while current holders could evaluate their position in light of the balanced risk-reward profile.
• It is crucial to monitor upcoming reports for any improvement in the Liquor segment's EBIT and management's ability to control costs, as these are the primary factors behind UBS's lowered forward earnings estimates.
• For income-focused investors, the company's consistent seven-year dividend growth streak is an attractive attribute that supports a long-term hold strategy, contingent on the core business fundamentals remaining intact.