Would I be crazy to buy Coles shares at $16?

Two couples race each other in supermarket trollies, having a great time, smiling and laughing.

The Coles Group Ltd (ASX: COL) share price has outperformed Woolworths Group Ltd (ASX:  WOW) over the past 12 months. Coles shares have fallen 8%, whereas Woolworths shares have dropped by 17% during the same period. At the time of writing, the Coles share price is trading at $16.56.

Both consumer staple stocks have underperformed the S&P/ASX 200 Index (ASX: XJO), which is up 8.6% over the past year. The retail sector has been hit hard by weak consumer sentiment due to rising energy costs, rents, and other necessity prices.Â

With this challenging business environment and Coles's share price outperformance compared to Woolworths, investors may be wondering whether now is the right time to invest in Coles shares.

Business growth outpaces rival Woolworths

Despite the weak consumer sentiment affecting both supermarket giants, Coles has outpaced Woolworths in the supermarket sector. In the March quarter, Coles achieved a 5.1% growth in supermarket sales, compared to Woolworths' 1.5% growth.

Coles benefitted from a successful promotion campaign, but CEO Leah Weckert believes the success goes beyond promotions. Weckert highlighted in the third quarter sales update:

We have delivered another solid sales result across our supermarkets this quarter reflecting strong execution of our trade plans and our continued focus on delivering great value and great quality alongside improved availability.

We have also seen a meaningful increase in customers interacting with our digital platforms and loyalty programs which is allowing us to engage on a more personalised basis with these customers.

Coles has implemented advanced technology such as Smart Gates to prevent theft, which was an issue last year. Additionally, Coles' online supermarket sales have increased significantly, rising 35% year-over-year in the March quarter, bringing online sales penetration to 9.3%.

How cheap are Coles shares compared to peers?

Coles shares are trading at 19 times FY24's estimated earnings. This compares with its past trading range of 17 to 25 times since being re-listed on the ASX in January 2019.

Comparing Coles to its competitors based on earnings estimates provided by S&P Capital IQ:

• The Woolworths share price is valued at 22x FY24's estimated earnings.

Foolish takeaway

A price-to-earnings ratio (P/E) of 19 might appear high, given Coles' single-digit earnings growth.

With that said, Coles offers high earnings visibility and predictability as a key player in the essential grocery market. The company generates strong cash flows, which support its dividend payments.

Coles shares are cheaper than some of its rivals and its own historical trading range. This is based on forward P/E ratios and currently a dividend yield of 3.3% using actual dividend payments over the last 12 months.

Considering all the factors mentioned, Cole shares could be a worthwhile investment for dividend-focused investors.

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Motley Fool contributor Kate Lee 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 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.