With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) charging 1.6% higher today as investors cheer on policy makers within the European Union who are expected to shortly approve further monetary stimulus measures, it is perhaps not surprising that shareholders in Woolworths Limited (ASX: WOW) are enjoying a rally in the retail giant’s share price.
What is perhaps surprising is the size of the gains (the stock is up 2.7%) given the negative news reports which have featured in the past few days.
On Tuesday, the Australian Financial Review ran a story which highlighted 10 challenges the supermarket operator faces according to analysis by investment bank Morgan Stanley.
Amongst the concerns highlighted were:
- A slowing consumer cycle
- The increasingly watchful eye of the Australian Consumer and Competition Commission (ACCC) on the sector
- Decreasing returns on equity (ROE)
Then on Wednesday the Fairfax press reported on the stellar performance of competitor Aldi Australia. In 2014 the German-headquartered group reported a 13% increase in sales which was approximately three times the growth rate of both Woolworths and Coles, which is owned by Wesfarmers Ltd (ASX: WES)!
Although this growth is off a much lower base – Aldi had sales of $6 billion which is well below second placed Coles with $29 billion – the view of some market watchers is that Aldi will continue to grow its market share as it expands into the new regions of Western Australia and South Australia.
Buy, hold, or sell?
Despite today’s gains, Woolworths’ share price is still down 9.6% over the past 12 months. The stock closed Wednesday’s trade at $30.87, which is above the target price of $27 that Morgan Stanley has on the stock. If the broker’s analysis and valuation is accurate then some investors will no doubt prefer to wait for a lower entry point.
Conversely, with the stock trading on a forecast price-to-earnings ratio of 15.2x and fully franked yield of 4.7%, long term, conservative investors may find today’s pricing quite appealing given the blue-chip status of the stock.