What is Woolworths Limited (ASX: WOW) really worth?
That depends on your view of the underlying business, naturally. If you thought Woolworths was set to bounce back and rise higher as sales growth commences, then today's prices of $24.82 are cheap.
On the other hand, if you think the company has an uphill battle ahead, today's prices could prove to be quite expensive, despite the company's 29% fall in value over the past year.
It's the kind of 'what-if' scenario stock market investors face every day, but price estimates coming out from industry analysts show that the experts are divided on the topic as well.
According to reports by Fairfax media, Merrill Lynch analyst David Errington has a 'Buy' recommendation and a target price of $40 on the stock.
Morgan Stanley analyst Tom Kierath has a 'Sell' rating, and a target price of $19.
Which is it?
To my mind, this decision calls for a look at Woolworths through a slightly different lens. Woolies is the biggest supermarket in Australia with highly convenient stores and a generally great range of products that consumers love.
The only way for it to lose business is for customers to buy less, or shop elsewhere.
Ergo, Woolworths must be doing something wrong, or competitors Wesfarmers Ltd (ASX: WES), Aldi are doing something better.
If you look at a list of complaints levelled against Woolworths' supermarkets, they often read something like this:
Poor variety/freshness of produce, low shelf stock, tired stores, higher prices, fewer new and innovative products. Complaints against its Masters' hardware chain are similar. Several shareholders have also opined that businesses like Big W are a drag on earnings.
Recent statements from Woolworths show that the company is aware of the problems and it is making numerous changes to stop the loss of market share, including lifting staff hours, refurbishing stores, changing store formats, adjusting the type of products held for different demographics, and so on.
Once the major problems are rectified, unsatisfied customers will probably return.
The busy nature of life in the cities dictates that time-strapped consumers will inevitably pop into their most convenient store occasionally for necessities. Consumers can be slow to change their preferences but they know where they have the best experience, and I wouldn't be surprised to see Woolworths return to at least stagnant sales in the near future.
This is key to the 'Buy' thesis of Merrill Lynch's analyst quoted above, who expects soft same-store sales growth to drive share prices.
However, that doesn't mean that Woolworths is a great buy today.
Cutting prices to drive volume and make items more affordable is likely to impact profit margins, and this combined with heavy capital investment is why Morgan Stanley's analyst expects shares to fall.
I subscribe to both views, and believe that the end result is likely to be somewhere in the middle of both price targets. Woolworths is a great company, with a solid dividend and reasonable prospects and I would be perfectly happy to hold it in my portfolio right now.
However, as a result of it being a business in transition I don't yet feel that it is an outstanding value purchase.
