Woolworths Group Ltd (ASX: WOW) shares could be in the buy zone at the current level.
That's the view of the team at Goldman Sachs, which has just added the retail giant's shares to its conviction list.
What is Goldman saying about the Woolworths share price?
Goldman Sachs has added Woolworths to its conviction list in place of its old drinks business Endeavour Group Ltd (ASX: EDV). It explained:
We update our forecasts for WOW, reiterate our Buy rating and add to our regional Conviction List, with TP to A$40.50 (from A$41.70). We remain positive on EDV and reiterate Buy but remove from Conviction List after recent out performance with TP unchanged at A$8.30. Since adding EDV on CL from March 28th, the stock is +9.1% vs ASX200 -10.3%.
We reiterate our key positive thesis on EDV as a defensive alcohol retail leader with material advantage in consumer loyalty, re-opening beneficiary and accelerated growth leveraging B/S. Whilst we continue to see 6% upside, WOW now has a higher upside of 10% (3rd highest in our consumer/retail coverage, but with clear catalysts to re-rating).
What are these key catalysts?
Goldman has named three key catalysts for a re-rating of the Woolworths share price. These are its superior growth in the core business, adjacent revenues with higher margins, and its valuation.
In respect to its growth, Goldman is forecasting a sales "CAGR of 6.6% and underlying NPAT of 14.1% over FY22-24e, with key driver being market share gain of AU Foods business." This is expected to be driven by an effective cost-price pass through and additional mix improvement with relatively stable volume growth.
As for its adjacent revenue opportunities, the broker highlights that Woolworths has a highly loyal consumer base and high frequency contact points. It believes that "the retail media business is the next material growth lever for WOW" and has "factored in A$1.1B sales, with 30% EBIT margin in 2030."
Finally, the broker sees scope for the Woolworths share price to trade on higher multiples. It highlights that the valuation gap between its shares are Coles Group Ltd (ASX: COL) is at its lowest point in years.
The broker believes this is "unwarranted" due to Woolworths being the "superior operator with faster growth outlook." In light of this, the broker expects " better comps and margin management to become apparent, and the stock to re-rate."
