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Is the Woolworths Limited share price worth just $22?

The Woolworths Limited (ASX: WOW) share price has fallen hard, but is it really worth just $22?

After all, less than two years ago the Woolworths share price was punching through all-time highs towards $38 per share. Investors couldn’t get enough. Indeed, the market was basking in Woolworths’ ability to become the world’s most profitable supermarket chain.

It’s obvious to us now, however, that Woolworths’ management got complacent. They lost track of the end goal: offering a superior service to customers; and took the easier short-term option, over the long-term sustainability of the business.

Unfortunately, shareholders – like me – are now paying the piper for management’s myopic strategy. Analysts agree. According to the 16 analysts surveyed by The Wall Street Journal, the average price target for Woolworths shares is $24.90. However, that includes one analyst’s target of $40! So you can take that estimate with a pinch of salt.

Research by analysts at UBS is also at odds with that price target. Cited in Fairfax Press, UBS analysts said, “We believe regaining leadership will take longer and cost more to fix, creating heightened earnings risk. Our ‘sell’ recommendation is unchanged.” The bank has a $22 price target on Woolworths, according to Fairfax.

Buy, Hold or Sell?

Earlier this year, I wrote an article that dug deeper into Woolworths’ valuation. Since then Woolworths has announced write-offs and profit downgrades, conducted a board-level reshuffle, decided to invest more in lowering shelf prices, and an ACCC investigation is underway.

Although it’s been clear for some time that Woolworths’ profit would fall, it may have more to lose than I initially forecast. And if that’s right, my refined intrinsic value estimate of between $26 and $28 could be wrong.

Setting a price target is simple, but hard to admit you got it wrong. In time, my mistake may be underappreciating the company’s ability to restore consumers’ perception of its valuable service.

Combined with managerial uncertainty, it’s safe to say I’m not a buyer of Woolworths’ shares today – despite my intrinsic value estimate being firmly higher than its current share price.

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Motley Fool writer/analyst Owen Raszkiewicz has a financial interest in Woolworths. 

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

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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