Is Woolworths a buy at this share price?

Credit: AS 1979

The Woolworths Limited (ASX: WOW) share price has plunged 36% since reaching a 52-week high of $34.71 back in February 2015, but not all of the falls can be blamed on the supermarket retailer.

Over the same period, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has dropped 19.8% – even entering bear market territory earlier today (classified as falling more than 20% from a recent high point).

That’s probably no consolation for Woolworths investors, and I’m sure many would be wishing they’d had their money in Blackmores Limited (ASX: BKL) instead. Blackmores’ share price is up more than 300% over the same period.

Woolworths has also managed to shoot itself in the foot at the same time and faces a number of major issues threatening several parts of its business…

  1. The rise of discount supermarket Aldi and ongoing competition with rival Coles – owned by Wesfarmers Ltd (ASX: WES) is threatening Woolworths’ core supermarket margins.
  2. CEO Grant O’Brien resigned in 2015, but the company has yet to find a replacement. Until it does, the board is virtually in caretaker mode.
  3. They did make one major decision in January which will have a major impact on the group – to sell off or close down the Home Improvement business, Masters. In the short-term, that could mean a number of large expenses and write-offs, but will also stem the losses from the hardware business.
  4. Discount variety store Big W is struggling to make a profit, and margins are shrinking.
  5. Woolworths is closing half its upmarket grocery stores, Thomas Dux, leaving it with just 4 stores – clearly a strategy that didn’t work.
  6. Profits and earnings are likely to fall in the short-term as a result – the company is forecasting a roughly 30% fall in net profit for the first half of the financial year 2016 (FY16).

After all that, you might not expect there to be any good news at all.

But there is light at the end of the tunnel for shareholders. Some of the above issues will be addressed this year, so Woolworths can move beyond them and focus on its remaining troubles. A CEO should be announced, and we should have more clarity over the impact of the sale/closure of Masters. That should also allow management focus more directly on its core supermarket business, and if we’re lucky, might see some improvement as early as this year.

Foolish takeaway

At the current price of around $22.36, Woolworths should still be making at least $1.8 billion in underlying profit for FY16, placing it on a P/E ratio of around 15x. That’s cheap compared to its average of over 20x since 1993, but the company still has to weather the oncoming storm.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

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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