On the back of a vicious selloff in global markets yesterday, shares of supermarket giant Woolworths Limited (ASX: WOW) today bounced as much as 5% higher before trading 3.6% up during afternoon trade.
Other than a notice of interest payments on Woolworths' hybrid shares (which should have no bearing on the company's ordinary share price) there was no company-specific news which could explain the surge in share price.
However, Woolworths' number one rival, Wesfarmers Ltd (ASX: WES), last week reported a robust set of full year results, including healthy revenue and profit growth. Although Wesfarmers has made a habit of outperforming its peer, investors may be inferring a similar type of result when Woolworths releases its annual report this Friday.
Keep an eye on this
In addition to same store sales (SSS) and growth in the Home Improvement division, the key metric I'll be watching this Friday is the Australian Food, Liquor and Petrol (AFLP) division's profit margins. This figure excludes the significant items the company announced on 17 June 2015.
Since the AFLP division accounts for around 89% of profit before significant items and corporate overheads, its profit margins are a meaningful assumption in my intrinsic value estimate of Woolworths shares – which is currently between $27 and $28.
Therefore, if Woolworths continues to experience significant margin pressure, the theoretical worth of the shares will fall.
I guess we'll just have to wait until Friday to find out if today's share price rise was justified.
