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Could Warren Buffett be tempted by Woolworths Limited’s low share price?

Recently there was speculation that a private equity firm was running the numbers on a bid for Australia’s largest retailer Woolworths Limited (ASX: WOW).

With the share price plunging 23% over the course of calendar year 2015 it’s arguably not surprising that cashed up investors could be sniffing around.

We already know that ASX-listed stocks are on the radar of famed investor Warren Buffett after his company Berkshire Hathaway took a stake in Insurance Australia Group Ltd (ASX: IAG) and while there hasn’t been any suggestion that Buffett is looking at Woolworths, it’s an interesting exercise to consider if it’s the type of stock which could tempt him…

Here are two things we know about Buffett:

  1. He wishes he had bought more shares of the USA’s largest retailer Walmart
  2. He wishes he had never bought shares in the UK-based Tesco

Buffett’s past experiences with two of the world’s most established retailers would no doubt shape his view on the attractiveness of the current opportunity which Woolworths presents.

On this score it’s worth remembering that Buffett likes to buy businesses with “franchise value” that he is highly confident will continue to grow for a long, long time.

That’s why he is so keen on global “franchises” like American Express and Coca-Cola – these are very strong brands with plenty more global growth potential.

While Woolworths’ low share price has arguably made the value investment proposition more appealing, it seems hard to have a high level of confidence that the group’s “franchise value” hasn’t become structurally challenged.

This challenge is reflected in Thomson Consensus Estimates of earnings per share (EPS) which show a decline to 141.5 cents per share (cps) in financial year (FY) 2016 from 195 cps in FY 2015. Further declines in FY 2017 and FY 2018 are also expected with EPS forecast at 140 cps and 128.5 cps respectively.

It’s also difficult to envisage the group successfully expanding offshore.

For these reasons I don’t think Buffett would be attracted to Woolworths despite its share price trading not only near 52-week lows but near nine-year lows too.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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