How can investors find out what the Aussie retail share is really worth?
The post How do you value the Woolworths (ASX:WOW) share price? appeared first on The Motley Fool Australia. –
The Woolworths Group Ltd (ASX: WOW) share price has had a strong year so far. Shares in the retail conglomerate are up more than 15% year to date compared to a 10% gain for the S&P/ASX 200 Index (ASX: XJO).
Valuing ASX shares is never an easy task. That’s especially true for a conglomerate-type company such as Woolworths. The Aussie company has interests divided across its Supermarkets, New Zealand Food and Portfolio segments.
Shares in the retail group are trading at $39.21 per share at the time of writing. So, how can investors work out how that compares to its “true” valuation?
How do you value the Woolworths share price?
A valuation can oftentimes be more of an art than a science. There are a few generally accepted ways to value shares and they all have their pros and cons.
The first, and perhaps most common, is a fundamental valuation via a discounted cash flow (DCF) method. This involves forecasting future earnings based on a variety of key assumptions and determining the present value of those cash flows.
The idea is that investors should be willing to pay approximately what they expect to receive in risk-adjusted future cash flows. Of course, if the Woolworths share price was trading under this value, it would be seen as a bargain.
The big knock on DCF models is the power of key assumptions. Simply changing the assumed annual growth rate of earnings, or the discount rate used, can have a huge impact on valuation.
Investors keen on valuing the Woolworths share price could also apply relative valuation techniques. That includes assessing how Woolworths’ dividend yield and price to earnings (P/E) ratio compares to its peers.
The obvious comparison here is against Coles Group Ltd (ASX: COL) as a pure-play supermarket. Woolworths shares are currently trading on a 2.75% dividend yield and 32.1 P/E ratio.
Coles shares are trading on a 3.58% dividend yield and 22.7 P/E ratio at the time of writing. On a basic level, that would imply that Coles shareholders are receiving more bang for their buck than Woolworths shareholders.
Of course, there are many differences between companies that can make comparisons difficult. These include exposure to other areas (such as Woolworths’ other retail exposures) and capital gains versus dividends.
Finally, investors wanting to value the Woolworths share price could use a comparable transactions approach. That would involve finding similar, recent retail takeover transactions and applying the transaction multiples paid (such as EBITDA to enterprise value multiple) to Woolworths’ numbers.
This approach can be difficult to find comparable, current data that provides meaningful valuations.
Valuing the Woolworths share price is a difficult business. What a fair price for the retail group looks like will depend on future growth assumptions which could be impacted by current group initiatives.
Investors often use multiple valuation approaches to calculate a range of values and find a median or average price to compare against the current share price.
The Woolworths share price is outperforming the ASX 200 this year, but it’s up to value-driven investors to see if there’s more value left in the ASX retail conglomerate.
Should you invest $1,000 in Woolworths right now?
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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.