Woolworths Delivers But Can It Continue?

Array
(
    [0] => Array
        (
            [0] => ((WOW))
        )

    [1] => Array
        (
            [0] => WOW
        )

)

This story features WOOLWORTHS GROUP LIMITED.
For more info SHARE ANALYSIS: WOW
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

As pointed out by analysts at Merrill Lynch, if ever Woolworths ((WOW)) was going to post a poor quarterly sales result the June quarter shaped as a likely suspect given the company was cycling tough comparable numbers, it was and is dealing with a slowdown in customer activity and it remains in the middle of renovating a number of its supermarkets across the country.

Despite all these factors the company still delivered what the broker views as a very impressive result, its core food and liquor operations registering a 6.7% sales increase and Big W doing well in a tough trading period. Total sales for the year came in at $47.0 billion, the 10.7% increase a little better than JP Morgan’s forecast of a 9.2% increase.

The only disappointment in the quarterly numbers according to Merrill Lynch was the performance of the New Zealand and consumer electrical divisions, but management also expressed its disappointment about these results and this leads the broker to suggest appropriate action will be taken to lift performance.

Post the result management indicated full year earnings will show an increase in profit of between 21-25%, this coming despite the company charging against profits many operating costs associated with the renovations and a number of one-off costs.

The solid result and re-iteration of earnings guidance means the market is turning its attention to the outlook for FY09 and here views are a little more mixed. Merrill Lynch argues the best is yet to come as the group is investing now to better position itself for the future, meaning there is no change to the broker’s Buy rating as it continues to see solid results in coming years.

ABN Amro is one to agree and sees the stock as good buying at current levels given the expectation management will deliver on the market’s expectations for earnings growth. JP Morgan is similarly positive, seeing recent share price weakness as offering a good entry point into a stock with sustainable sales growth and defensive earnings, two attributes difficult to find in the current environment.

UBS is also keeping its Buy rating, taking the view even though the stock is somewhat expensive at current levels this is offset by the fact the earnings are secure, cash flows are strong and margins continue to expand.

But Macquarie suggests the stock is no more than a Hold at current levels as the market is currently too high in its expectations for future earnings growth, suggesting the rest of the market is wrong if it assumes the company can continue to deliver the growth it has reported in recent years.

This suggests a re-pricing is needed, although any share price weakness is likely to be limited in the broker’s view as there remains scope for the group to consider using its strong cash flow generation to buy back 2-3% of its issued capital each year if suitable acquisitions cannot be found.

To reflect its view Macquarie is somewhat below the market in terms of its earnings forecasts, estimating earnings per share (EPS) in FY09 of 142.8c against JP Morgan at 147.3c, UBS at 149c and Merrill Lynch at 157c. Overall the FNArena database shows a consensus EPS forecast for FY09 of 149c, which compares to the 132c expected this year.

The average price target on the stock is $29.92, which suggests upside of almost 17.5% from current levels. Again there is a wide range of forecasts, with Citi and Macquarie at the lower end at $26.30 and $26.42 respectively, while UBS leads the way at $34.80, having revised its target down from $36.07. Overall the stock is rated as Buy six times and Hold four times.

After climbing post the sales result yesterday shares in Woolworths today are higher again in a stronger overall market and as at 12.15pm the stock was up $1.21 or 5.0% to $25.47. This compares to a trading range over the past 12 months of $22.85-$35.05.

Click to view our Glossary of Financial Terms