Has this broker made the right call on Woolworths Limited?

Woolworths Limited (ASX:WOW) is facing pressure from many angles according to broker Morgan Stanley.

| More on:

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.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of May 24th 2021

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned.  

More on Investing