Woolworths Limited's share price hits new decade low – Can it recover?

Woolworths Limited (ASX:WOW) shares might not be a contrarian investor's perfect pitch.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What: Shares in Woolworths Limited (ASX: WOW) have this week notched up an unpleasant milestone for shareholders in hitting a fresh 52-week low of $20.50.

So What: While technical analysts may have all sorts of theories about what this means, for fundamental investors it is simply a reminder that it has been roughly a decade since the share price was this low.

For contrarian investors, the investment case for Woolworths is certainly becoming intriguing.

On a per share basis, earnings more than doubled from financial year 2006 to financial year 2015 – earnings per share are however forecast to decline in the current 2016 financial year.

Likewise, dividends more than doubled over the past decade – but once again a decline is forecast for the current financial year.

Book value per share more than doubled

Return on equity remained roughly flat over the prior decade

Now What: Based on historical data, it's easy to see why contrarian investors could have a positive investment thesis on Woolworths at the current share price.

However, while the past can be very important in helping form an opinion of the future, valuation does ultimately require being roughly right in your judgement of the future earnings ability of a company.

One of the problems in this instance is that Woolworths has historically earned a market-leading profit margin. In fact, compared to other leading supermarket operators around the world, Woolworths really has been "world class".

Contrarian investors hoping for a "reversion to the mean" scenario may find that Woolworths' impressive profit margin is a thing of the past. Refreshed competitive pressure from Coles, owned by Wesfarmers Ltd (ASX:WES) and new entrant competition from the likes of Aldi and Costco, may render Woolworths'  future profit margin much more mundane.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »