It's been an interesting few weeks for Woolworths Limited (ASX: WOW), with the retailer seeing its CEO depart after around four years at the helm, an earnings downgrade and also a downgrade by Moody's. Clearly, this is a tough time for the company's investors and, while its share price has fallen by 7% in the last month, I believe that Woolworths is a great long-term buy.
Certainly, there is likely to be considerable upheaval in the short run, as a new management team are likely to make drastic changes to turn the company's fortunes around. Furthermore, another profit warning seems likely – especially since the outlook for the supermarket sector is one of margin pressures and greater competition. However, Woolworths continues to offer good value, with a price to sales (P/S) ratio of just 0.54, a great yield of 5.2% and a track record of having increased earnings at an annualised rate of 11.2% during the last ten years. As such, the ingredients for a great business and superb investment are there.
Despite this, I believe that Scentre Group Ltd (ASX: SCG) is a better buy than Woolworths at the present time. That's at least partly because of a brighter outlook when it comes to its trading conditions, with the shopping centre operator likely to benefit significantly from improved consumer spending resulting from an ever-looser monetary policy. Certainly, a lower interest rate should boost Woolworths' sales, too, but this looks set to be offset to a substantial degree by a price war that involves no-frills operators such as Aldi and Costco and which is likely to hurt Woolworths' margins over the medium term.
Furthermore, Scentre also offers bottom line growth at a reasonable price, with the company's price to earnings growth (PEG) ratio being very low at just 0.28. This compares favourably to the ASX's PEG ratio of 1.31 and, with Woolworths set to post a fall in earnings over the next two years, Scentre Group appears to have a clear catalyst to push its share price higher, while Woolworths may see its guidance come under further pressure.
In addition, Scentre also offers a higher yield than Woolworths, with it having a yield of 5.3%. Looking ahead, Scentre is expected to increase dividends at an annualised rate of 3.4% during the next two years, which should keep income rises above inflation as well as beating Woolworths on this front, which is set to nudge dividends downwards by 0.3% per annum during the same time period.
And, while Woolworths may have a longer track record than Scentre (which only listed in June last year after Westfield's reorganisation) Scentre appears to have been warmly received by investors, with its shares having risen by 23% since then. As such, and due to its better growth prospects, great valuation, superior dividend outlook and more favourable operating conditions, Scentre seems to be a better buy than Woolworths at the present time.
