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Woolworths: Aussie Giant Overvalued

Michael Turner profile picture
Michael Turner


  • Woolworths Group Ltd's stock price has been in a strong uptrend since mid 2016 and is once again nearing record highs.
  • This has left Woolworths with a record high forward P/E ratio of over 23, despite stagnant/falling revenue over the past 5 years.
  • With competition in the sector increasing and the Australian economy worsening, Woolworths' extreme valuation looks vulnerable.

Note: This article refers to the ASX listed Woolworths Group Limited (OTCPK:WOLZY) (WOW.AX). All amounts listed are in AUD unless otherwise specified.

The Stock

Woolworths Group Ltd is an Australian conglomerate engaged in retail operations, with segments including food and petrol, New Zealand Supermarkets, Endeavour Drinks Group, BIGW, and Hotels. Since reaching multi-year lows in mid 2016 on the back of fears over increasing competition and poor management, the stock has been bid up over 45%, nearly reaching its all-time highs of $37 yet again.

(Source: Google Finance)

However, its current valuation is far too optimistic considering the fact that the fears which caused the massive sell-off in 2014-2015 have not been comprehensively addressed, while the ability of Woolworths' operations and growth is questionable at best, in terms of trying to justify the stock's current valuation. At its current price, the market has bid Woolworths' forward P/E to an all-time high.

(Source: Natrade/Reuters)

This extreme valuation (compared to the average ASX200 PE ratio of approx. 16) suggests that the market is expecting a significant turnaround in Woolworths' near-term future. However, recent history suggests this is unlikely, as revenue has been stagnant/falling for several years.

(Source: Yahoo Finance)

While at first glance, 2017's improved result seems highly promising, this is only due to the sale of the exceptionally poorly conceived and executed Masters hardware store experiment which caused a lag in 2016's results, and it's not a sign of any significant turnaround in underlying performance. Per Citigroup:

Based on supplier feedback, Woolworths is experiencing a slowdown in sales momentum. We forecast a drop from 4.5% in 3Q18 to 3.3% in 4Q18e, as the company laps 6.4% LFL sales growth in 4Q17."

Woolworths is expected to deliver same-store sales growth ahead of main rival Coles (1.7% exp growth in 4Q18); however, Coles' performance is expected to turnaround

This article was written by

Michael Turner profile picture
I am based in governance roles in Sydney, Australia - as such, a large portion of my research is focused on the quality of governance in mid-cap ASX listed corporations.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (2)

James Hanshaw profile picture
Australia has hardly been touched by online shopping yet. Amazon made a hash of some things there and my contacts in Australia - family members - laugh at the thought it will change anything in their way of life. Likewise they laugh at Aldi’s prospects. Australian has been so far removed from many things that have hit the rest of the world for so long, such as recessions, that the complacency there is hard to believe. No doubt management at firms like Woolworths are just as complacent and they will not know what hit them when the real world finally arrives.

Household debt is already among the highest in the world, the easy high paying jobs in the resources sector are going or gone. I sold my last investment there several months ago.
Michael Turner profile picture
Hi @James Hanshaw ,
Thanks for your comment! Absolutely agreed re the widespread complacency in Australian boardrooms/management teams. Many blue chips here are in for a shock in the not-to-distant future!
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