Is the Woolworths Group Ltd (ASX: WOW) share price a buy?
The Woolworths share price is almost at the same level that it was at six months ago, so at face value it seems investors don't seem to think it's worth any more than at last reporting season.
The main pieces of Woolworths-specific news that we've seen since last August were the first quarter sales results and the sale of the petrol business to EG Group.
We're about to get the half-year report this month, but the first quarter could reveal much of how the numbers are going to go.
In the 14-week period to 30 September 2018 Woolworths' total sales from continuing operations grew by 1.9%. The key Australian Food segment also grew sales by 1.9%. Endeavour Drinks grew sales by 3%. New Zealand Food grew sales by 2.6% (in AUD terms) and Big W grew sales by 1.3%.
These aren't bad numbers at all, but it's not exactly incredible growth either. Reducing food prices are great for consumers but it makes it hard to grow profit margins or the bottom line.
But, the turnaround of Big W continues and Woolworths is in a much better place than when its sales were decreasing and Masters was closed.
Some institutional investors may be hoping that the $1.725 billion sale of 540 Woolworths-owned fuel convenience sites to EG Group could lead to attractive capital management initiatives such as a buy-back or special dividend. We will likely receive an update about this during the month.
Woolworths is a fairly high-quality business with defensive attributes and a grossed-up dividend yield of 5%. There are good reasons to like holding it in a defensive portfolio.
However, it's trading at 22x FY19's estimated earnings, which is fairly pricey for a business growing sales at less than 2%.
Coles Group Limited (ASX: COL) has announced a number of initiatives to try to grow faster than Woolworths including smaller-format stores in high-density areas, a trial with Uber Eats and new automated distribution warehouses. Woolworths may have to invest heavily just to maintain its market position.
I think the easy returns with Woolworths were made between 2000 and 2008, before the international competition like Aldi, Costco and Amazon were fully operational. I don't think it's currently a great time to invest in Woolworths shares.
