26x earnings and a 3% yield for a mature business like Coles makes no sense to me.
To be fair, today's results were great -- sales volumes and margins are up, and they seem to be suggest upper single digit earnings growth in the year ahead. And it's a rock solid business, super defensive and with a wide moat.
But, as with Woolies, it's just super hard to make the case for value UNLESS you expect elevated multiples to persist. Which, maybe the will? But i never like being beholden to the market's mood in order to get a decent return.
For example, let's assume they grow EPS by 8% per year for 5 years (which would be an incredible achievement), and let's also assume they trade at a PE of 20x at that point (above their long term average, and well above the market's long run average), then you'd be looking at a 2030 share price of ~$23.63, or a <1% CAGR on the share price. You get slightly above 5% if you factor in dividends and franking credits.. but boy, it's far from exciting.
And that assumes an historically elevated market multiple.
I know i've been banging on about this with regard to Woolies for a long time. But, in my defense, shares there have essentially gone sideways for 5 years. The total return for shareholders since before COVID has been utterly "meh".
Both are great businesses, don't get me wrong. But the market is pricing them for the kind of growth that will be difficult to achieve. at least in my opinion.
