Woolworths Limited (ASX: WOW) has proven to be a fantastic investment for shareholders over the past two decades.
As can be seen from the graph above, Woolworths' share price has delivered exceptional returns. Throw in an extra $13.27 in dividends, and it has proven to be one the best blue-chip stocks on the entire ASX.
However, as can also be seen from the graph, Woolworths' share price has come under threat in recent times – down 24% over the past year alone!
Market commentators have credited the falls to margin pressure in the Australian Food and Liquor business, which includes its supermarkets, Dan Murphy's and more; as well as its struggling Masters home improvement business.
Australian Food and Liquor is by far Woolworths' most important business for revenue, accounting for 79% of sales. However, it's even more important to the profit line, accounting for 86% of the company's total. Recent pressure from key rivals Coles, Aldi and Costco, as well as the possible entry of Lidl, has forced Woolworths to compete fiercely on price.
The home improvement business as a whole, including its Masters and Home Timber and Hardware offering; is yet to produce a profit since being created in 2011/2012. In its 2014 financial year, the business reported a loss of $170 million.
Is it time to buy Woolworths shares?
Despite falling hard in recent years, unless Woolworths can push back against competitive pressures from its rivals within the supermarkets business and revive investors' hopes for a successful Masters business, then its shares are not a good buy today. For example, if I assume modest profit margin compression in the supermarket business and first profitability for home improvement in 2018, my intrinsic value estimate for shares is around $27.
If you're a bit more bullish on the prospects of Masters, then the valuation could jump meaningfully higher.
Personally, I think Masters will grow to become a competitor of Bunnings Warehouse in time. I also think Woolies' dividend is reliable and worthy of closer inspection in the current low-interest rate environment.
