Consumer Discretionary

Woolworths and Coles shares more expensive than Alphabet and Apple: A cause for concern?

Fri 20 May 22, 12:16pm (AEST)
REIT 1 Woolworths shopping centre supermarket
Source: iStock

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Key Points

  • Woolworths and Coles trade at price-to-earnings ratios of 27 and 24 respectively
  • A sharp selloff has discounted Alphabet and Apple to PE ratios of just 22 and 22 respectively

US tech giants Alphabet and Apple are both trading at lower price-to-earnings (PE) ratio than local supermarket giants Woolworths (ASX: WOW) and Coles (ASX: COL).

Megacap deflation

Fed tightening, sticky inflation and recession risks have taken a massive toll on growth stocks, notably tech.

Alphabet shares are down -24% year-to-date and trading at a PE of 20. The company reported weaker-than-expected March quarter earnings, with a slowdown in revenue growth and disappointing YouTube ad revenues.

Apple is down a likewise -24.5% year-to-date and trading at a similar PE of 22. Slowing iPhone sales and covid-related supply chain constraints have weighed on the company’s growth outlook.

Premium supermarkets

Defensive and strong cashflow businesses have managed to weather the selloff better than most. Woolworths is down -7.3% year-to-date while Coles is trading flat for the year.

From a valuation perspective, Woolworths trades at a forward PE of approximately 27 and Coles trails behind at around 24.

Recent March quarter updates from both Woolworths and Coles were largely positive.

Generally speaking, supermarket sales inched higher, covid-related costs began normalising and supply chain conditions were improving. Both Woolworths and Coles shares closed higher the day of their March quarter updates.

Why?

One possibility for the price tag is that capital in the ASX remains trapped in certain companies due to factors such as fund and super allocations, weightings and investment mandates.

The ASX is a rather awkward market, weighted heavily towards and without the need to name names - five banks, three iron ore miners, a biotech/plasma giant, a toll road operator, a telco and a supermarket giant.

Headwinds on the horizon?

Thursday was a massive wake up call for local consumer discretionary and staple stocks after major US retailers - Walmart and Target - reported much lower-than-expected earnings as higher logistics and fuel prices, elevated labour costs and aggressive inventory levels eroded margins.

Woolworths dipped -5.6% on Thursday, and Coles held up slightly better, down -3.4%.

"Turning to the local market, we think Australian retailers will suffer a similar set of issues, and as such, we are avoiding the consumer discretionary names," said Aequitas Investment Partners in a note on Thursday.

Written By

Kerry Sun

Finance Writer & Social Media

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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