Woolworths Limited’s share price hits new decade low – Can it recover?

Credit: Woolworths

What: Shares in Woolworths Limited (ASX: WOW) have this week notched up an unpleasant milestone for shareholders in hitting a fresh 52-week low of $20.50.

So What: While technical analysts may have all sorts of theories about what this means, for fundamental investors it is simply a reminder that it has been roughly a decade since the share price was this low.

For contrarian investors, the investment case for Woolworths is certainly becoming intriguing.

On a per share basis, earnings more than doubled from financial year 2006 to financial year 2015 – earnings per share are however forecast to decline in the current 2016 financial year.

Likewise, dividends more than doubled over the past decade – but once again a decline is forecast for the current financial year.

Book value per share more than doubled

Return on equity remained roughly flat over the prior decade

Now What: Based on historical data, it’s easy to see why contrarian investors could have a positive investment thesis on Woolworths at the current share price.

However, while the past can be very important in helping form an opinion of the future, valuation does ultimately require being roughly right in your judgement of the future earnings ability of a company.

One of the problems in this instance is that Woolworths has historically earned a market-leading profit margin. In fact, compared to other leading supermarket operators around the world, Woolworths really has been “world class”.

Contrarian investors hoping for a “reversion to the mean” scenario may find that Woolworths’ impressive profit margin is a thing of the past. Refreshed competitive pressure from Coles, owned by Wesfarmers Ltd (ASX:WES) and new entrant competition from the likes of Aldi and Costco, may render Woolworths’  future profit margin much more mundane.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget BHP and Woolworths. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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.