The Woolworths Group Ltd (ASX: WOW) share price has been among the best performers on the ASX 50 over the last three months
Since this time in May, the conglomerate's shares have risen by a solid 15% to $39.97.
Is it too late to invest?
While I have a preference for rival Coles Group Ltd (ASX: COL), I still see Woolworths as a solid addition to a balanced portfolio. Especially for those seeking a source of income in this low interest rate environment.
One broker that is sitting on the fence following its full year results release is Goldman Sachs. This morning the broker retained its neutral rating and lifted its price target to $38.80.
What did Goldman Sachs think of Woolworths' results?
Goldman Sachs notes that Woolworths' sales were in line with expectations in FY 2020 and trends remain strong across all its divisions so far in FY 2021.
The broker commented: "Sales across all divisions were broadly in line with our forecasts. However, the trading update into the 1st 8 weeks of FY21 offered a positive surprise with double digit sales growth in all divisions (excl. NZ supermarkets which was +8.3%), despite cycling through elevated pcp sales from continuity programs."
Goldman was also pleased to see that the company's online sales are growing quickly, noting that online sales grew 84.6% overall and 99% in the Food business.
And while its elevated costs have taken a bit of the shine off its strong start to the year, the broker notes that they are reducing.
It said: "The group has however guided that COVID-19 related costs have persisted, though at lower levels than 4Q20 (4Q20 run rate of A$24mn per week to A$13mn pw in 1Q21). This implies ~$160mn over the quarter compared to guidance from COL at c. A$100mn for 1Q21."
Another positive in FY 2020 was the company's cash flow, which led to a strong cash conversion ratio of 124.4%. It notes that this was driven by a beneficial working capital position from the ongoing strength in sales. Though, much of this is forecast to unwind over FY 2021.
In light of its strong start to the year, the broker has upgraded its earnings estimates and price target accordingly.
"We revise group EBIT forecasts by +1.8% in FY21 and +0.5% in FY22. NPAT revisions are c. 3.2% on an underlying basis in FY21 and +1% in FY22. Earnings revisions and updating trading multiples have resulted in revisions to our 12m Target Price to A$38.80 (previously A$36.80). We are Neutral on WOW," it concluded.
Based on Goldman's estimates, Woolworths' shares are changing hands at 30x FY 2021 earnings and offer a forward fully franked 2.5% dividend yield.
