Woolworths Limited shares soar 4.4% – Is this a “buy” signal?

Credit: Woolworths

The share price of Australia’s largest retailer Woolworths Limited (ASX: WOW) closed 4.4% higher on Monday at $23.64.

It was a great performance, particularly in light of the continued sell off in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), which followed overseas leads to close down 0.7%.

The reason for the rally was an update from the company regarding its Home Improvement Joint Venture (JV) with US giant Lowe’s.

The JV covers both the Masters Home Improvement and the Home Timber & Hardware businesses and has been a serious source of angst for many shareholders ever since it was first formed.

The update – which announced that Woolworths would look to exit the hardware sector all together – will not come as a surprise to a number of close followers of the company. Indeed, many shareholders may be cheering the decision.

In order to undertake a sale or wind-up of the Masters and Home improvement businesses, Woolworths must first buy out its 33.3% JV partner Lowe’s as per the terms of their original agreement.

Management has provided guidance that it will take at least two months for the JV buy out to occur and then it will take additional time to undertake the sale or wind-up process.

How will this impact value?

With Woolworths’ board making a clear cut decision to exit its foray into the hardware sector, its peer Wesfarmers Ltd (ASX: WES) which owns the hugely successful Bunnings hardware business will no doubt be ecstatic that it has managed to see off such a deep-pocketed competitor.

The question for investors now is what this strategic decision to exit the hardware category means for the future outlook of Woolworths.

On the one hand it closes the door on what could have been a very big growth opportunity for the group. It also throws into doubt the potential success of any future growth initiatives the group may consider undertaking outside of the company’s immediate core competencies.

On the other hand, with the Home Improvement division losing $225 million in earnings before interest and tax in financial year (FY) 2015 alone, the immediate benefits to the bottom line are obvious.

Indeed, it’s likely that the market views the simple act of closing down the business as a value-enhancing decision.

With the reduction in losses from the Home Improvement division arguably improving the overall valuation that the market will place on Woolworths, the stock could arguably have just become more appealing to long term, buy-and-hold investors.

That being said, it’s worth remembering that arguably the single largest problem facing Woolworths is not its Home Improvement division but rather the competition its supermarket division is facing from not just Coles but Aldi and other potential new entrants as well.

Don't miss your chance to "invest like a Pro"...

What will be the blue chip stocks of tomorrow? Motley Fool Pro -- our most comprehensive and innovative ASX investment service -- will reopen for a brief time, to accept new members. That means you've got the chance to follow along as one top investor puts $1,000,000 of The Motley Fool's own money to work...all in ASX stocks. And you're invited to watch everything that goes into our decision -- 100% FREE! We've dubbed this innovative project, Motley Fool Pro. Click here to step inside for an exclusive look around - it's FREE!

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.