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On Wednesday, the S&P/ASX 200 Index (ASX: XJO) was out of form and sank deep into the red. The benchmark index fell 0.75% to 7,547.7 points.

Will the market be able to bounce back from this on Thursday? Here are five things to watch:

ASX 200 expected to rebound

The Australian share market looks set to rebound on Thursday following a solid night of trade on Wall Street. According to the latest SPI futures, the ASX 200 is expected to open the day 37 points or 0.5% higher this morning. In late trade on Wall Street, the Dow Jones is up 0.1%, the S&P 500 has risen 0.5%, and the Nasdaq is 0.7% higher.

Oil prices tumble

ASX 200 energy shares including Beach Energy Ltd (ASX: BPT) and Woodside Energy Group Ltd (ASX: WDS) will be on watch after a tough night for oil prices. According to Bloomberg, the WTI crude oil price is down 1.5% to US$76.71 a barrel and the Brent crude oil price is down 1.4% to US$81.60 a barrel. Surging US crude stockpiles put pressure on oil prices.

Telstra results

Telstra Group Ltd (ASX: TLS) shares will be on watch today when the telco giant releases its half-year results. According to a note out of Goldman Sachs, it expects Telstra to report EBITDA of $4,054 million (versus the consensus estimate of $4,038 mllion) and earnings per share of 9 cents.

Gold price edges lower

ASX 200 gold shares such as Newmont Corporation (ASX: NEM) and Northern Star Resources Ltd (ASX: NST) could have a subdued day of trade after the gold price edged lower overnight. According to CNBC, the spot gold price is down 0.2% to US$2,003.7 an ounce. Traders were selling gold after rate cut hopes faded.

CBA shares rated as a sell

The team at Goldman Sachs believes investors should be selling their Commonwealth Bank of Australia (ASX: CBA) shares. In response to the bank’s half-year results, the broker has reiterated its sell rating with a trimmed price target of $81.98. It said: “1H24 cash earnings were below our expectations driven by higher-than-expected BDDs (no provision releases).”

The post 5 things to watch on the ASX 200 on Thursday appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• How are Woodside shares avoiding the market selloff today?
• Everything you need to know about the CBA dividend
• Own BHP shares? Here’s your first-half results preview
• CBA shares tumble 3% on half-year profit decline and margin pain

Motley Fool contributor James Mickleboro has positions in Woodside Energy Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It’s fair to say that ASX healthcare shares have flummoxed investors over the past couple of years.

As interest rates headed up and consumers closed their wallets, many fund managers expected the health sector to outperform because of their defensive nature.

Perhaps because of the unusual nature of the current downturn with consumers having a massive savings buffer from COVID-19, that thesis never really played out.

But now, as the prospect of rate cuts becomes tantalisingly close, there seems to be a light at the end of the tunnel for long-struggling healthcare shares.

“We’ve got a couple of key holdings in the portfolio in small-cap healthcare,” QV Equities portfolio manager Marc Whittaker said in a video blog.

“That’s a sector that I’m really excited about. Valuations are really compelling.”

So if you’re looking for cheap health stocks to pick up right now before they shoot up, these are the ones QVE team is backing:

‘Excited’ for a return to business-as-usual

With a $600 million market cap, Australian Clinical Labs Ltd (ASX: ACL) is the third largest pathology services provider in the nation, according to Whittaker.

“Pathology is a great sector,” he said.

“It’s really about volume… You run your laboratory, largely across a fixed-cost network. And the more volume you can put through your laboratory network, the higher your operating leverage, the higher your scale, efficiencies, and so on.”

After a 43% drop in the share price since August 2022, his team is “excited” about Australian Clinical Labs’ prospects.

“Top line’s growing at around 5% to 6%, and that’s roughly in line with what we think the long term average is for the sector. So that’s been encouraging.”

After the surge in COVID-19 testing a couple of years ago, the environment and financial metrics are starting to recover back to normal.

“On the margin side, or the cost side, things are still washing through a little bit.”

GP shortage is rapidly being addressed

The post-pandemic story is similar with diagnostic imaging provider Integral Diagnostics Ltd (ASX: IDX), with the stock losing more than half its value since April 2022.

The problem for both businesses, according to Whittaker, is that there is “a bottleneck when it comes to GP visitation”.

“Whether that’s because people are still loathe to get back to the GP after the COVID experience and/or the fact there’s a bit of a shortage in GPs at the moment.

“We’ve had a controlled immigration intake for quite some time, and that really means a lot of GPs we rely on [who] come from offshore haven’t been arriving.”

But that inflow of foreign doctors is starting to now recover, and will be a tailwind for Integral Diagnostics.

“Top line’s doing okay, costs just need to start normalising a little bit,” said Whittaker.

“That top line should be enhanced by these GP visitations as they improve over time.”

The healthcare shares backed by irresistible themes

He added that both Integral and ACL, in the long run, have the demographic trend of an ageing population in their favour.

“Both are compounders in my view, so longer term, we expect them to keep delivering.”

QVE senior portfolio manager Simon Conn likes that both companies also have scope to improve efficiencies.

“One of the things I like about the sector is the technology — pathology and radiology, both benefiting from technology,” he said.

“So the ability to diagnose more things with pathology tests and radiology scans is really seeing the amount of work that these businesses do grow over time.”

The post 2 ASX healthcare shares with ‘compelling’ valuations to buy appeared first on The Motley Fool Australia.

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• 3 ‘attractive’ small-cap ASX shares ready to rocket in 2024

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Integral Diagnostics. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Did you know there are roughly 2,400 ASX shares?

This means that even finance journalists like me occasionally come across tickers that I’d never before.

It also means that, at any given time, there are plenty of good buys that you don’t even realise they exist.

So with an open mind, take a look at the two stocks below that Glenmore Asset Management portfolio manager Robert Gregory is keen on.

They are both investment management companies, which is perhaps why they’re not discussed much by experts from rival financial firms.

It’s all a bit “meta”:

The small-cap ASX shares ‘ahead of our expectations’

Pacific Current Group Ltd (ASX: PAC) is reportedly a small team but has a pretty decent market capitalisation of $507 million.

The share price has risen 35% over the past 12 months, with a 7.4% boost in January alone.

Gregory attributed this to a business update late in the month.

“PAC released its quarterly funds under management (FUM) update, which was ahead of our expectations,” he said in a memo to clients.

“PAC reported group FUM of $227 billion at 31 December 2023, up +6% over the December 2023 quarter.”

The company’s boutique private capital brands Pennybacker, Victory Park, and ROC Partners all performed strongly.

“PAC’s guidance for FY24 is for total new commitments of $2 to $5 billion. Given $2.6 billion was delivered in the first half, the company is well placed for a strong FY24.”

Despite the rocketing share price, the stock remains great value for those willing to buy now.

“PAC trades on an FY24 PE multiple of ~13x, which is very attractive in our view given the robust earnings outlook.”

All six analysts agree on this one

Pacific Current owns a 4% piece of fellow investment house GQG Partners Inc (ASX: GQG), which Gregory and the Glenmore team is also bullish on.

The GQG share price also impressively rocketed 10.3% last month.

“GQG released a strong December 2023 funds under management (FUM) update, showing FUM increased from US$113 billion, end of November, to US$121 billion.

Again, notwithstanding a 37% lift in the stock price over the past 12 months, Gregory reckons GQG shares are still cheap.

“GQG continues to trade on a very attractive valuation and has a strong outlook for new inflows in 2024 given its outstanding track record across its various global equity funds.”

Pleasingly, Gregory’s peers unanimously agree.

According to CMC Invest, all six analysts covering GQG rate the stock as a buy right now.

The post 2 cheap and ‘attractive’ ASX shares to buy now that you’ve not thought of appeared first on The Motley Fool Australia.

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More reading

• What can owners of GQG shares expect in the upcoming FY23 result?
• Why the GQG share price is up 7% to a 52-week high and could keep rising
• 2 soaring ASX shares I’d buy now with no hesitation
• Morgans names the ASX cyclical shares to buy for earnings season
• Are ASX growth shares back? How these fundies delivered over 20% upside in 2023

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Although the S&P/ASX 200 Index (ASX: XJO) has climbed more than 11% since the start of November, there are still some bargains to be snapped up for long-term investors.

Remember, each dollar you save on the buying cost is a dollar added to your eventual returns.

So while it’s impossible to time the market, entry cost matters.

Here are three ASX shares going for cheap that I can think of:

Just the start of a long journey

Xero Ltd (ASX: XRO) is a long-time favourite for growth investors, but its share price has recently stalled somewhat.

In fact, the accounting software maker is now more than 10% down since the start of September.

But the long-term outlook remains positive under chief executive Sukhinder Singh Cassidy, who has been at the helm for a year now.

She was brought in with a mission to transform the former growth-at-all-costs business to a growth-with-positive-cash-flow model.

There will be hiccups along the way, which is why the stock has spluttered over the past six months.

But long-term investors know the shift will take some time.

Professional investors certainly seem to appreciate this, with 12 out of 19 analysts currently surveyed on CMC Invest rating Xero as a buy.

The ASX shares for economic optimists

Mining technology provider RPMGlobal Holdings Ltd (ASX: RUL) is also another stock that’s made plenty of people rich in the past.

The share price has more than doubled over the five years, although it’s now 17% off its December 2021 peak.

And that could make for an ideal buying opportunity.

The macroeconomic tailwinds are certainly in place.

In the west, interest rates are already stabilising and a cut could even be not too far away. 

Meanwhile, in China, its fight against deflation continues. This could mean direct or indirect economic stimulus could be imminent.

In both regions, the developments could drive up consumption, send commodity prices higher, and RPMGlobal’s clients could have more to spend on tech.

Both Moelis and Veritas recommend RPMGlobal shares as a strong buy, according to CMC Invest.

A cheapie that’s 73% more expensive than a year ago

Staying with the mining theme, Chrysos Corporation Ltd (ASX: C79) provides assay services with unique technology that speeds up the testing with higher accuracy compared to traditional methods.

You may raise your eyebrows that I call this a bargain, since the stock price has rocketed 73% higher over the past 12 months.

However, Chrysos shares are down almost 21% since 10 January, presenting a dip.

For the same reasons as RPMGlobal, I’m bullish on Chrysos.

The high part of the mining cycle could come in the next few years, and service providers like Chrysos could really cash in.

All three experts surveyed on the CMC Invest broking platform rate the shares as a buy.

The post 3 ASX shares I think you’ll be glad you bought at these prices appeared first on The Motley Fool Australia.

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More reading

• Why are ASX 200 tech shares taking a beating today?
• 2 ‘oversold’ ASX shares to get onto right now at ‘attractive entry levels’
• 2 ASX stock picks with explosive potential
• I think this ONE factor gives ASX shares a huge chance to make big returns
• Brokers say these ASX mining shares are strong buys in February

Motley Fool contributor Tony Yoo has positions in Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Chrysos, RPMGlobal, and Xero. The Motley Fool Australia has positions in and has recommended Chrysos and Xero. The Motley Fool Australia has recommended RPMGlobal. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Every so often, I take you through an ASX stock to demonstrate how much money you could have made if only you invested it a year or two ago.

The latest edition of this exercise though, stings a little more personally than others.

Let’s take a look at online luxury fashion retail platform Cettire Ltd (ASX: CTT).

Cettire vs the world

Back only 19 months ago, the Cettire share price was languishing at 38 cents.

It seemed everything was against this business.

Consumers were hurting from rapid interest rate rises and cost-of-living pressures. High-end fashion brands were unhappy that the deliberate scarcity of its products were deteriorating via an online platform.

It just did not seem like the world wanted $20,000 handbags.

I had some Cettire shares at that point. Let’s say you bought $20,000 worth to join me on the ride.

Like any good long-term investor, I wanted to ride out this short-term pessimism. So I held on to the ASX retail stock.

Cashing in at 163% profit

Only a few months later, in mid-September of 2022, my faith had been rewarded.

The Cettire share price had rocketed a massive 163%.

The economic conditions were still similar though, if not worse. Consumers had endured three more rate rises, inflation was still raging, and luxury goods makers were still unhappy about Cettire selling to the masses.

I thought, let’s not be greedy. Let’s sell while this retail stock is buoyant, to reduce risk.

If you exited with me then, your original $20,000 would have turned into $52,600.

That’s an outstanding return in the space of just one winter. You’d be pretty happy with that.

If you learn nothing else from this retail stock…

But look what’s happened since.

Cettire, both the business and the stock, have gone from strength to strength.

Now the share price is trading above the $4.50 mark.

That $20,000 investment you made? If you didn’t sell out when I did and instead held on, it would now be worth a whopping $238,947.

That’s a near 12-bagger in just 19 months.

There are two morals to this story.

First is that making a substantial profit is a terrible reason to sell. It’s not a decision made about the future of the company and the stock.

Second is that only a few winners will wipe out all the losses from your duds, if you have a well diversified stock portfolio.

Have a think about that when you make your trading decisions.

The post If you’d put $20,000 in this ASX retail stock 19 months ago, you’d have $239,000 now appeared first on The Motley Fool Australia.

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More reading

• Is buying investment property in regional areas like buying ASX small-cap shares?
• Why Bell Potter says these ASX small cap shares are buys
• Bell Potter says this rocketing small cap ASX share can keep climbing
• Why Cettire, Dexus Industria, Pilbara Minerals, and Zip shares are jumping today
• Cettire share price rockets 40% on ‘exceptional result’

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cettire. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The post Here are the top 10 ASX 200 shares today appeared first on The Motley Fool Australia.

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• Why AMP, Core Lithium, Downer EDI, and IDP Education shares are racing higher
• Looking for passive income? This ASX All Ords stock just boosted its dividend by 33%!
• This ASX 200 stock is surging 10% following a return to profit growth
• AMP share price rockets 10% amid 2023 earnings boost
• Why is the ASX 200 index crashing 1.5% on Wednesday?

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Idp Education and Reliance Worldwide. The Motley Fool Australia has recommended Idp Education. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It’s Valentine’s Day! You know what everyone probably wants to do today? Talk about inflation! Chocolate prices recently hit all-time highs. I think that can tell us a number of things about today’s ASX share market.

Chocolate prices see an unwelcome spike

According to reporting by CNBC, cocoa prices hit an all-time high last week because of deteriorating weather conditions and disease challenges, which hurt crop production in the African countries of Ghana and the Ivory Coast.

Those two countries are responsible for almost two-thirds of global production.

Cocoa futures have reportedly jumped around 40% since the start of 2024, reaching an all-time high of US$5,874 per metric tonne.

David Branch, senior vice president at Wells Fargo Agri-Food Institute, said:

What’s really driving all of this is basically this El Nino that’s in place right now. It’s really affecting the crop.

Chocolate prices are going to be higher. Product manufacturers are just raising the margins and telling the retailers to eat it, and they have to try to sell it at a higher price.

What this tells me about the ASX share market

Firstly, I think it says that the inflation story is not completely over yet.

We heard earlier this week that the US consumer price index rose by 0.3% in January, according to CNBC, which was more than expected. It was driven by shelter prices increasing by 0.6% over the month, which made up more than two-thirds of the increase. Excluding volatile elements, the core CPI went up 0.4% for the month and 3.9% (compared to expectations of 0.3% and 3.7%, respectively). The US Federal Reserve is aiming at a target of 2% annual inflation.

With (ASX) share market investors seemingly pinning their hopes on multiple rate cuts this year, that view may end up premature. It’s possible there could be multiple cuts in Australia this year, but it’s also possible there may be no cuts at all. Remember, Australia’s interest rate is materially lower than the US, the UK, New Zealand and Canada.

Ultimately, share prices should be representative of what’s happening with a company’s profit and growth. A lot of share prices have risen over the last few months, so they need to report numbers that justify the valuation.

Look at what happened to Commonwealth Bank of Australia (ASX: CBA), it reported that net profit after tax (NPAT) declined amid strong competition, and that sent the CBA share price lower. Some retailers have managed to beat forecasts.

Also, remember interest rates should be influential on asset prices. We haven’t seen this RBA cash rate for a long time, yet share prices are generally at/close to all-time highs. Even a reduction of the RBA cash rate to 4% or 3.5% would mean it’s much higher than where it was in 2019.

I do think business profits (and share prices) can climb over the longer term, and I continue to see long-term opportunities in certain places. But, I also believe investors should be careful about some industries and some valuations if the aim is to beat the market’s return.

If we look carefully, there are definitely still some appealing ASX share market opportunities.

The post What all-time high chocolate prices can tell us about the ASX share market appeared first on The Motley Fool Australia.

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More reading

• Guess which ASX 300 director just cashed in $2.3 million worth of company shares
• Are Metcash shares worth buying for that fat 6% dividend yield?
• How are Woodside shares avoiding the market selloff today?
• How price cuts on the shelves could hurt Coles shares
• I’d grow my wealth by buying these so-called ‘expensive’ ASX stocks

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Looking at the Metcash Limited (ASX: MTS) share price today, and it’s likely that the first thing that will catch your eye with this ASX 200 consumer staples stock is Metcash’s current dividend yield.

Metcash is having a pretty awful Wednesday, alongside the rest of the ASX 200 Index today. At present, the company has lost a painful 1.91% and is down to $3.59 a share. This fall has given the company’s dividend yield a boost though. At this pricing, Metcash is trading on a whopping trailing dividend yield of 6.13%.

This dividend yield comes with full franking credits attached too, so grossed-up, investors are looking at a yield of 8.76%.

Compare Metcash’s raw dividend yield to that of its peers in the grocery and hardware spaces.

Woolworths Group Ltd (ASX: WOW) currently trades with a dividend yield of just 2.95%.

Coles Group Ltd (ASX: COL) does better with its yield of 4.14%.

Bunnings owner Wesfarmers Ltd (ASX: WES) meets in the middle, with its present yield of 3.25%.

All of those yields come fully franked too. However, they don’t really hold up against Metcash’s monstrous yield.

So should dividend investors sell out of Coles and Woolies and flock into Metcash shares for dividend income today?

Is Metcash’s 6% dividend yield too good to ignore?

I think there are two factors investors looking at Metcash shares for dividend income today need to consider.

Firstly, Metcash has a long history as a reliable dividend payer. It has paid a dividend every six months since 2017 and has usually delivered an annual pay rise too. In 2017, the company dished out 10.5 cents per share in dividends. But this had risen to 22 cents per share by 2023.

2023’s payouts were a little behind those of 2022 (22.5 cents per share). But the company’s overall income history tells a good story in my view.

Secondly, Metcash is, in my view, not nearly as strong a company compared with Coles, Woolworths or Wesfarmers.

To illustrate, last August saw Coles report a 5.9% rise in revenues for the 2023 financial year to $10.5 billion. Earnings from continuing operations rose 1.8% to $1.86 billion.

Woolies reported revenue growth of 5.7% over the same period to $64.29 billion, with earnings rising 15.8% to $3.12 billion.

Metcash unfortunately runs on a different calendar to these two businesses. But in December, the company revealed that its revenues for the six months to 31 October were up 1.3% to $7.84 billion. Earnings over the same period were down 3.4% to $246.5 million.

In the long term, Metcash has failed to grow revenues and compound earnings at anywhere near the same rate as its larger competitors.

This probably explains why the Metcash share price today trades at the same levels as it was back in mid-2005. Coles wasn’t listed in its current form back then, but Woolworths shares have grown by 260% over the same period. Wesfarmers shares have also more than doubled since mid-2005.

Foolish takeaway

So all in all, I think there is a place for Metcash shares in an investor who relies on dividend income to live off. Retirees, for example, will probably appreciate the stonking dividend yield currently attached to the Metcash share price.

But there’s a reason this dividend yield is so high – investors are simply pricing Metcash at a lower valuation than its better-performing rivals. So I think most investors who aren’t at the stage of living off of their dividends can find better options elsewhere.

The post Are Metcash shares worth buying for that fat 6% dividend yield? appeared first on The Motley Fool Australia.

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More reading

• 3 ASX shares that could soar thanks to the RBA
• Why Champion Iron, Core Lithium, Metcash, and West African shares are sinking
• These 3 ASX 200 shares just got some big broker upgrades!
• Why are Metcash shares tumbling today?
• Metcash shares paused for $325m capital raising to fund Superior Food acquisition

Motley Fool contributor Sebastian Bowen has positions in Wesfarmers. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Coles Group and Wesfarmers. The Motley Fool Australia has recommended Metcash. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Woodside Energy Group Ltd (ASX: WDS) shares are having a better day that most on Wednesday.

In afternoon trade, the energy giant’s shares are trading flat.

As a comparison, the ASX 200 index is currently down 1%.

Why are Woodside shares avoiding the selloff?

There are a couple of reasons why Woodside shares are faring well today. The first is an increase in oil prices overnight despite the hotter than expected inflation reading.

Another reason is that the company has released an announcement relating to the Trion oil and gas project in Mexico.

According to the release, the company has received approval for its Social Impact Assessment from the Mexican Ministry for Energy.

Woodside’s Social Impact Assessment was submitted in May 2023. It provides a comprehensive assessment of the project and outlines the ways in which the company will manage social impacts.

Management believes that the approval is an important milestone for Trion. Woodside Executive Vice President of Projects, Matthew Ridolfi, said:

This approval marks an important milestone on the pathway to developing this nationally significant resource project. We appreciate the ongoing support we have received from the Mexican government for Trion.

The approval also validates Woodside’s approach to how we engage with communities wherever we work and recognises our high operating standards. It reflects the excellent work of our technical team, our consultants, and the strong professional relationships we have established with Mexico’s regulatory authorities.

What is Trion?

Trion is a greenfield development that would represent the first oil production from Mexico’s deepwater once operational.

It is located in the Gulf of Mexico at a water depth of 2,500m, approximately 180km off the Mexican coastline.

It is being developed by Woodside Energy in a joint venture with PEMEX, with first oil targeted for 2028.

The post How are Woodside shares avoiding the market selloff today? appeared first on The Motley Fool Australia.

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More reading

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• How another acquisition could boost Woodside shares following the collapse of the Santos deal
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Motley Fool contributor James Mickleboro has positions in Woodside Energy Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Coles Group Ltd (ASX: COL) shares are down more than 10% in the last six months, and the economic pain for the ASX supermarket share may not be over if shelf prices fall.

In the last two years, there have been periods of time where the market was excited by Coles’ ability to pass on price rises to consumers. During FY23, we did see the company’s gross profit margin slightly increase, meaning it seemed to have increased prices a little more than what suppliers had charged.

If the company’s earnings before interest tax (EBIT) margin stays the same (or rises), then revenue growth due to inflation is helpful. For example, if Coles’ EBIT margin were 5%, it’d make $5 of EBIT on a $100 basket of goods. If the EBIT margin stays at 5% and the basket price rises to $110, Coles would make $5.50 of EBIT. That’s a stronger bottom line from inflation, even though the margin hasn’t changed. I think this is why Coles shares rose a couple of times during 2022 and 2023.

Food prices to fall?

We’ve already seen Coles reduce lamb prices in supermarkets by a significant amount and there are potentially more cuts for some products under consideration.

Reporting by The Australian this week suggested that supermarkets are wanting to cut prices amid political pressure from a federal Senate inquiry into supermarket prices.  

Coles has reportedly asked some suppliers for price cuts to reflect a decline in inflation and a reduction of input costs such as logistics and raw materials, which are now cheaper than recent peaks. However, The Australian reported that some suppliers may not give in easily to those price-cut requests because they want to protect their own profits.

In a submission to the Senate inquiry, Coles said its energy, labour logistics and packaging costs had increased by $1.4 billion between 2019 to 2023, with $600 million of that being because of higher employee costs, driven by wage increases. It said:

Significant increases in global commodity prices have flowed through to Australia and impacted Coles and its suppliers, resulting in the pass-through of increasing input costs to fresh and packaged goods.

Lower profits for Coles?

If the company sees lower profit, that could be a headwind for Coles shares.

While some input costs may have reduced, wage and rent costs are increasing for Coles.

Plus, even if its EBIT margin somehow stays the same, Coles’ profit may suffer from deflation if the (above example of) $110 basket of goods heads back towards a cost of $100.

The broker UBS thinks Coles is likely to lose market share over the next six months, with Aldi best-placed to take market share, while Woolworths Group Ltd (ASX: WOW) also has the potential to gain share.

Coles could see increased costs from its new Witron and Ocado automated warehouses.

UBS thinks the Coles EBIT will fall to $1.85 billion and net profit after tax (NPAT) could fall by around 10% to $997 million, leading to an approximate 10% fall in the dividend per share. However, Coles is then expected to see earnings recover to almost FY23 levels in FY25 and eclipse FY23 in FY26.

The post How price cuts on the shelves could hurt Coles shares appeared first on The Motley Fool Australia.

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More reading

• 3 no-brainer ASX dividend stocks to buy for market-beating returns in 2024
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• Citi says Coles and these ASX dividend stocks are buys
• Falling yields? I’d buy these ASX dividend beasts for a beefed-up income in 2024
• Brokers say these ASX dividend stocks are buys

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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