Why you shouldn’t buy Woolworths shares

There’s no better loved or widely recognized Australian company than Woolworths (ASX: WOW).

The supermarket retailer boasts one of the most valuable brands Down Under, and its interests reach far behind just the iconic Woolies stores and into bottle shops, petrol stations, hotels and beyond. Most recently, the company has focused on building out its DIY and home improvement concepts, including the Masters chain.

Most recently, Woolworths’ market update saw the company revise its guidance for greater after-tax profit growth, with the projected growth range raised from 4% to 6%, up to 5% to 6%. That’s not too shabby for a $42 billion company, especially one that faces competition at every turn from Wesfarmers (ASX: WES), operator of Coles and Bunnings.

Now for the contrarian view…

But with Woolworth shares looking pricey relative to this growth, at over 18 times earnings and on an EV to EBITDA bases of over 10, it’s arguably not the time to buy this iconic company. For Woolworths shareholders, the big gains are likely in the past, as the company conquered the vast supermarket space. Today’s retail opportunities – including DIY and home improvement – are smaller and worth less.

That’s no to say Woolworths is going to cease to grow altogether, or worse, disappear from the face of the earth. Far from it. But it’s hard to ignore the fact that the company’s growth avenues are more limited than they were 10 or 15 years ago, or see the share price as representing good value today.

The Foolish bottom line

From this point on, one could expect Woolworths share to roughly match or even underperform the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO). This may be just the contrarian view, but still, investors looking for the best chance to beat the market over the next three to five years might want to look elsewhere.

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Motley Fool writer/analyst Catherine Baab-Muguira owns no shares in any company mentioned in this article.

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