While the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) has fallen some 7% in the last 30 days, shares of Woolworths (ASX: WOW) have fallen nearly 10% over the same period – and savvy investors should be paying close attention in case of a further drop.
Valuation and defensive play
Today, Woolies’ shares are trading for 18 times earnings. But should the share price drop and this multiple compress further, this premier Australian company could enter cheaper – even “buy” — territory.
Woolworths isn’t just a premier Australian company, of course. With its business centered in consumer staples – groceries, beer – it could make an excellent holding in the event of a recession Down Under. While consumers might cut back their spending at, say, at a department store like David Jones (ASX: DJS), they’re not likely to stop buying milk, cheese and bread at Woolies.
Some analysts have expressed concern around Woolworths’ Masters chain of home improvement stores, yet the company has said this chain is on target to break even in 2015-2016.
And while nearly 100 Australian companies have issued earnings downgrades of late, even market darlings such as Cochlear (ASX: COH), there’s been no such news from Woolworths. The company has forecast net profit after tax growth of between 4% and 6% for the full year.
The bottom line for investors
Sure, you wouldn’t call this sort of profit growth spectacularly exciting – Woolworths is, on the whole, a mature business. But for stability and relative safety, it could be a good bet, at the right price. Woolworths shares also pay a fully franked dividend, with a yield in the 4% range.
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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any company mentioned in this article.