Australia | Jul 19 2006
By Terry Hughes
While the company’s fourth quarter sales result bought little in the way of surprises, several analysts are starting to express concerns that Woolworths (WOW) is looking expensive.
The company’s food and liquor division is largely viewed as performing well, but Big W and consumer electrical sales were slightly below expectations, due to what Citigroup says was tougher competition from the likes of JB Hi-FI (JBH) and Rebel Sports (REB). This has prompted minor earnings downgrades across the board.
With the stock having risen by more than $1.30 over the past month to close yesterday at $19.99, it is now trading close to the average target of $20.14, so no wonder that some brokers are starting to see it as expensive at current levels.
Although the analysts at Credit Suisse saw the quarterly result as consistent, they are of the view that the share price is overpriced in the near term and that it is becoming more vulnerable to possible operational issues.
ABN Amro also expresses concerns, about the high level of expectations factored into the current share price, pointing out that the market is factoring in 20% earnings growth in FY07, well above the company’s 10-15% guidance.
On the other hand Deutsche Bank is happy with its 23% growth assumption and expects the company to hit the top end of its earnings guidance range, which UBS criticises for being too broad at this stage of the financial year.
UBS also sees the stock as expensive on a Price/Earnings basis, but flags the potential for positive earnings revisions from "Trans-Tasman harmonisation and Project Refresh."
Aspect Huntley and GSJB Were are also more upbeat, arguing that the stock deserves its current premium, also expecting Project Refresh and market share growth to drive earnings growth.
Probably the most bullish on the stock is Merrill Lynch. The broker expects the company to deliver "exceptionally strong earnings growth," from March/April 2007 when it goes live with its supply chain management system.
In the meantime, the stock is rated positively by two brokers, hold by six and negatively by two after macquarie this morning lowered its recommendation to Underperform.