Woolworths Limited (ASX: WOW) shares look cheap using conventional metrics like price-earnings ratio (P/E) and dividend yield.
Indeed, the recent rise and — significant — fall of Woolworths shares (pictured above) will have many investors asking…
Are Woolworths shares ridiculously cheap?
Credit Suisse thinks the shares are trading below its estimated fair value. The investment bank revised downwards its price target 5.2% to $24.50 earlier this week, according to Dow Jones Newswires.
At Woolworths' current share price of $21.81, it leaves a modest margin of safety (the difference between estimated value and current share price) of 12%.
However, the consensus among all analysts is roughly in-line with Woolworths' current price.
Is Woolworths a risky bet?
Together with Wesfarmers Ltd (ASX: WES), the owner of Coles, Bunnings, Kmart and more, Woolworths (which also owns Big W, Masters and Home Timber and Hardware) was estimated to control 43% of all retail sales in Australia in 2015. At the time, retail spend accounted for 20% of the Australian economy.
So although the two leaders are now being challenged, Woolworths' shares have appeal.
However, despite the recent falls in price, share market investors should demand more than a 12% margin of safety with any investment they make. The margin of safety adjusts for the risk/uncertainty in valuation models.
Foolish takeaway
With consensus price targets around $21, its shares do not appear to be ridiculously cheap today, just cheaper. Therefore, before buying its shares, you should demand a healthy buffer between the market price and estimated value.
