Should you buy Woolworths shares today?

Woolworths (ASX: WOW) shares are dipping some 2% today – against a slight rise in the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) — as the retailer has issued a profit update. What does the news mean for investors, and should you buy shares today?

“Substantial opportunity for growth”

The company announced it has made positive progress in its Masters chain of home improvement stores, a joint venture with Lowe’s. According to the release, the home improvement market remains compelling and a likely source of growth, with Woolworths citing the market’s overall sales value of $42 billion in 2012 and fractured nature, the largest player having just 16% market share – likely Bunnings, owned by Wesfarmers (ASX: WES).

Sales for Woolworths’ overall home improvement division climbed nearly 50% over last year, with Danks posting 4% growth and Masters posting growth of 262% (on a 53 week basis). There are 15 Masters stores now open for 12 months or more, and Woolworths reports these stores are meeting their business sales targets and customer response has been “very pleasing.” Though currently operating at a loss, the company expects the Masters chain to break even in financial year 2016.

Raised profit guidance

Overall, Woolworths now expects net profits after tax to grow in the 5% to 6% range, up from previous growth estimates in the 4% to 6% range. It’s a relatively good result, but investors will want to balance the news against the current valuation of Woolworths shares, which still look a bit richly priced at about 19 times trailing earnings. In other words, keep this powerful Australian retailer on your watch list and wait for a further pullback.

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Motley Fool contributor Catherine Baab-Muguira does not own shares in any company mentioned in this article.

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