Just when we thought it couldn't get any worse, shares of Woolworths Limited (ASX: WOW) have fallen yet again.
Source: Google Finance
In fact, this week's 7% decline takes shares of Australia's leading supermarket operator down 30% year-over-year. That compares to a fall of just 11% for the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
So what's an investor to do?
Is it time to sell out altogether, or is this the buying opportunity we've been waiting for?
According to The Wall Street Journal, 10 of the 16 analysts surveyed rate Woolworths as a sell or underperform – just two rate it as a buy.
However, as my colleague Tim McArthur wrote this morning: "While there would certainly appear to be downside risks to future earnings, with the stock trading on a price-to-earnings ratio of 12.9x and a fully franked dividend yield of 5.5%, arguably much of that downside is already priced in."
Indeed, too many investors have a habit of buying and selling at completely the wrong moments.
After all, wasn't the threat of Aldi, a resurgent Coles, and a profitless Masters Home Improvement business evident last year, when Woolworths' shares were changing hands at over $36? Today, Woolies shares are changing hands at $25.50.
Buy or Sell?
I've previously opined that fair value for Woolworths shares lies somewhere around $28. However, having a 10% discount to fair value (which is what we have now – $2.50/$25.50) isn't a wide enough margin of safety to warrant a buy rating. So Woolworths shares might not be a clear cut buy.
However, in my models I assumed falling profit margins in supermarkets, growing capital expenditure in both supermarkets and Masters; and no profits from the Home Improvement division (which includes Masters and Home Timber and Hardware) until 2018. Given that the company recently hinted at falling margins in the years ahead, it would seem my assumptions were valid and add to the reliability of my fair value estimate. Therefore, I do not think Woolworths is a sell.
While the lack of a new CEO is a big concern for me, I'm not selling my shares, nor am I rushing out to buy more. Instead, I think Woolies is a 'Hold' today.
And as I wait for a CEO appointment and monitor the business, I'll sit back, kick up my feet and soak up a juicy 5.5% fully franked dividend.
