The Woolworths Group Ltd (ASX:WOW) share price could be in the buy zone right now according to one leading broker. Here’s why…
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The Woolworths Group Ltd (ASX: WOW) share price could be in the buy zone according to one leading broker.
This morning Goldman Sachs upgraded the retail giant’s shares to a buy rating with a $43.60 price target.
This price target implies potential upside of 12% over the next 12 months excluding dividends. Including them, the total potential return stretches to almost 15%.
In light of this, the broker now has buy ratings on both Woolworths and rival Coles Group Ltd (ASX: COL).
Why did Goldman Sachs upgrade Woolworths?
According to the note, the broker has revised its valuation for Woolworths to reflect its greater execution in Food and Liquor.
It now values its Australian Food segment at an EV/EBIT multiple of 20x, compared to 18x previously.
Goldman believes this is fitting for its current growth profile. It is forecasting slower but solid growth in the supermarket category over the coming years.
It commented: “Overall, we forecast Food segment growth to be at +3.4% and +3% respectively in FY21 and FY22 and revert to our longer term growth expectations of +4.5% in FY23. After excluding c. 1.5% of space growth, this implies comparable growth in the industry at +2.3% and +1.5% respectively in FY21 and FY22. While our forecasts for COL and WOW are well ahead of our FY21 industry expectations due primarily to divergence between ABS data and company results over 1H21, company level forecasts are in line with our industry forecasts for FY22 and FY23.”
Its analysts made a similar revision to its Endeavour Drinks business, which it now values at 18.5x EBIT versus 16.5x previously. It believes the business deserves to trade at this level due to its stable demand and strong market position.
What else did Goldman say?
In addition to the above, Goldman notes that Woolworths’ shares now trade at a 7% discount to the Industrials ex. Financials index. This compares to a longer term average premium of +12%.
Furthermore, Goldman points out that its “valuation also compares favorably vs. global supermarket peers relative to growth – WOW’s PEG ratio is above trend for first time in three years, suggesting an improvement in relative value for its growth profile.”
Overall, in light of the above, Goldman Sachs believes the Woolworths share price is good value at the current level.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.