Is the Woolworths share price a buy?

Is the Woolworths Group Ltd (ASX:WOW) share price a buy?

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Is the Woolworths Group Ltd (ASX: WOW) share price a buy?

2019 has been an excellent year for the supermarket business, the Woolworths share price has risen by 28.6% in just over eight months.

I have been surprised and impressed by how much investors have gotten behind the supermarket giant over the year.

Whilst continuing operations profit after significant items fell 9%, I thought it was impressive that before the significant items Woolworths reported its sales grew 3.4%, earnings before interest and tax (EBIT) increased by 5% and net profit after tax (NPAT) increased by 7.2%. The result was driven by the Australian food division with its normalised EBIT increasing by 3.8%.

Woolworths has definitely won back customers over the past couple of years. But can it shrink to greatness? It recently sold its petrol business and now wants to divest the Drinks and Hotels businesses.

It could be a risky strategy to put all of the earnings eggs in the supermarket basket because there is growing competition – European retail giant Kaufland is soon going to be opening its first stores in Australia. Aldi will soon reach its full network potential and is steadily growing too. 

Food prices excluding tobacco continue to fall each year – each quarter in-fact – which makes it a bit harder for Woolworths to grow profit on lower-costing products.

In the first eight weeks of FY20 Woolworths achieved comparable sales growth of 7.5% reflecting lower sales growth in the prior year and the success of the Lion King collectables program. Indeed, the Lion King promotion has been a big hit in our house.

Foolish takeaway

Woolworths is trading at 26x FY20's estimated earnings. Whilst Woolworths has pretty defensive earnings, I think this is quite an expensive price when you think about some of the growth shares you can get at reasonably similar prices – A2 Milk Company Ltd (ASX: A2M) is only priced at 33x FY20's estimated earnings.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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 Scott Phillips.

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