Are Woolworths Limited shares ridiculously cheap?

Credit: DubSnipe

Woolworths Limited (ASX: WOW) shares look cheap using conventional metrics like price-earnings ratio (P/E) and dividend yield.

Source: Google Finance

Source: Google Finance

Indeed, the recent rise and — significant — fall of Woolworths shares (pictured above) will have many investors asking…

Are Woolworths shares ridiculously cheap?

Credit Suisse thinks the shares are trading below its estimated fair value. The investment bank revised downwards its price target 5.2% to $24.50 earlier this week, according to Dow Jones Newswires.

At Woolworths’ current share price of $21.81, it leaves a modest margin of safety (the difference between estimated value and current share price) of 12%.

However, the consensus among all analysts is roughly in-line with Woolworths’ current price.

Is Woolworths a risky bet?  

Together with Wesfarmers Ltd (ASX: WES), the owner of Coles, Bunnings, Kmart and more, Woolworths (which also owns Big W, Masters and Home Timber and Hardware) was estimated to control 43% of all retail sales in Australia in 2015. At the time, retail spend accounted for 20% of the Australian economy.

So although the two leaders are now being challenged, Woolworths’ shares have appeal.

However, despite the recent falls in price, share market investors should demand more than a 12% margin of safety with any investment they make. The margin of safety adjusts for the risk/uncertainty in valuation models.

Foolish takeaway

With consensus price targets around $21, its shares do not appear to be ridiculously cheap today, just cheaper. Therefore, before buying its shares, you should demand a healthy buffer between the market price and estimated value.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned in this article. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

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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