The iconic local supermarket ‘Woolies’ has seen its share price rally from the low $20’s to the high $20’s over the past 12 months , wrestling back its dominance over Coles which it had lost for 7 long years. Looking at like for like sales growth below, there have been ebbs and flows but overall a big turnaround from Woolies since the start of 2017 – however that momentum is now starting to soften.
Like for Like sales growth – Coles v WooliesSource; Shaw and Partners
In the past month, the WOW share price has rallied around 8% pushing up through $28.00, with the Supermarket now trading on a forward PE based on consensus earnings of 22.4x - making WOW the world’s most expensive Supermarket. Looking at international comparables highlights this fact nicely. i.e Carrefour 16.8x, Sainsbury 14.3x, Kroger 11.5x, Tesco 17.3x, Walmart 17.5x, Morrison’s 18.7x, Casino Guichard 15.5x, WES 18.2x and MTS 16.1x
Now looking at WOW versus the market, it’s trading at a 45% premium to the market multiple (15.5x) yet delivering only 4-9% earnings growth in FY19. Although the certainty / stability of earnings is a key contributor to the current valuation, the PE is too high in our view particularly given the competitive landscape is changing and will likely become far more aggressive especially from Coles, and ALDI, Costco, IGA, AMZN, Kaufland and potentially Lidl.
The other factors supporting the view is margins, which are extremely high in Australia which in itself will entice competition however the biggest near term threat to Woolies is the demerger of Coles in 2019. We’re cynical investors so it’s hard not to think that Coles will do everything in their power between now and then to list with very good momentum – which we started to see in the recent quarterly sales update.
Market Matters Take/Outlook
We are negative Woolworths at current levels targeting a move down to $25.00 i.e ~10% lowerWoolworths (WOW) Chart
Source; Shaw and Partners
In the past month, the WOW share price has rallied around 8% pushing up through $28.00, with the Supermarket now trading on a forward PE based on consensus earnings of 22.4x - making WOW the world’s most expensive Supermarket. Looking at international comparables highlights this fact nicely. i.e Carrefour 16.8x, Sainsbury 14.3x, Kroger 11.5x, Tesco 17.3x, Walmart 17.5x, Morrison’s 18.7x, Casino Guichard 15.5x, WES 18.2x and MTS 16.1x
Now looking at WOW versus the market, it’s trading at a 45% premium to the market multiple (15.5x) yet delivering only 4-9% earnings growth in FY19. Although the certainty / stability of earnings is a key contributor to the current valuation, the PE is too high in our view particularly given the competitive landscape is changing and will likely become far more aggressive especially from Coles, and ALDI, Costco, IGA, AMZN, Kaufland and potentially Lidl.
The other factors supporting the view is margins, which are extremely high in Australia which in itself will entice competition however the biggest near term threat to Woolies is the demerger of Coles in 2019. We’re cynical investors so it’s hard not to think that Coles will do everything in their power between now and then to list with very good momentum – which we started to see in the recent quarterly sales update.
