Is the Woolworths share price at fair value?

According to analysts, the Woolworths Limited (ASX: WOW) share price is at fair value.

WOW share price

Source: Google Finance

What are analysts recommending?

According to a survey of 16 analysts by The Wall Street Journal, the consensus recommendation on Woolworths shares is a ‘hold’ with a price target of $26.30. That doesn’t leave much room for error, given the Woolworths share price is currently $26.70.

Should I trust what analysts are saying?

In my opinion, it’s important to take analyst price targets with a pinch of salt.

Indeed, analyst price targets are just that: targets. What’s more, to derive a value for Woolworths shares, analysts often use forecasts underpinned by their opinion on the company – so the price target is often very subjective.

Therefore, to understand their recommendation, we really need to understand their opinion. For example, are they expecting big things from Dan Murphy’s? Or is Big W likely to return to profitability?

At the end of the day, these are the important considerations.

It’s also worth noting that some analyst price targets may be determined using technical analysis. Technical analysis does not consider a company at all. It uses share prices and trade volume to predict human buying and selling behaviour.

If you are a long-term investor, technical analysis forecasts are likely worthless to your assessment of value because many of them will be myopic (i.e. short term).

Do I need to value a company’s shares?

You don’t need to value shares yourself to understand a company and make an informed investment. I have interviewed investors with billions of dollars under their control who don’t do their own valuations. That might sound crazy, but some of these market-beating investors often believe their time is better spent understanding the qualitative features and risks of a company. They leave the valuation to independent analysts or use conventional metrics like the price-earnings ratio.

For example, Woolworths is facing stiff competition from the likes of Coles, owned by Wesfarmers Ltd (ASX: WES), Aldi, Costco and online platforms. In my opinion, understanding how Woolworths’ CEO, Brad Banducci, plans to combat these threats is more important to long-term investing than trying to determine whether the change in net working capital will be $10 million or $12.5 million in 2019.

Buy, Hold or Sell

In my opinion, Woolworths shares are not a bargain at these levels. However, I also said that in June 2016 — when the Woolworths share price was below $22.

While I wouldn’t be surprised to see the company continue its recovery in 2017, I’m still looking for other dividend share ideas.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Wesfarmers Limited. 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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