Supermarket retailer Woolworths Limited (ASX: WOW) has seen its shares sink 8.3% since the end of August, more than the S&P/ ASX 200 Index's (Index: ^AXJO) (ASX: XJO) fall of 6.7%.
At the current price of around $33.89, the retailer is trading on a prospective P/E ratio of 16.5x, and paying a fully franked 4.1% dividend yield. That doesn't appear expensive for a company of the quality of Woolworths.
The company dominates Australia's supermarket sector, in fierce competition with arch-rival Coles – owned by Wesfarmers Limited (ASX: WES), but also owns discount variety store Big W, petrol stations and convenience stores, liquor stores and hotels, as well as its much publicised Masters hardware venture with US giant Lowes.
While most analysts and market commentators have focused on the underperforming Masters, the supermarket business continues to go from strength to strength. Woolworths continues to wring every last cent of improvement it can from its supply chain and squeeze its suppliers for cheaper prices. The last point is evident in the struggles Coca-Cola Amatil Ltd (ASX: CCL) is having in growing margins for its supermarket-sold drinks products.
Masters should become profitable in the near future, albeit later than management would like, adding another lever of growth in earnings for the retailing giant.
One thing to watch though, is the rise of the 'alternative' supermarkets such as Aldi, Costco and possibly the resurgence of IGA, back by Metcash Limited (ASX: MTS). As UK retailers recently found, Aldi is forcing the likes of Tesco, Morrison's, Asda and Sainsbury's into cutting prices, and is taking market share from its bigger competitors. It may only be a matter of time before Aldi's management turns it eye to Australia.
With excellent management, I'd suggest that Woolworths can weather the potential storm, and as such deserves a spot on every serious investor's watchlist. At these prices, I'm very tempted to top up my holding.
