According to analysts, the Woolworths Limited (ASX: WOW) share price is around fair value.
Indeed, of the 16 analysts surveyed by The Wall Street Journal, just four analysts have a “buy” rating with the average price target being a touch under $27. At their current price of $25.50, it does not leave much room for error.
In investing, the difference between a share’s price and the valuation is the margin of safety. If the share price is lower than the valuation, you have a margin of safety. If the price is higher than the valuation, you don’t.
The analysts who publish these ‘price targets’ or ‘valuations’ are called ‘sell side analysts’. They are paid to write reports on companies regardless of whether or not they will — and can — buy the shares for themselves. Unfortunately, in my opinion, these analysts cannot always be trusted because in some instances there are outside influences which can deter the analyst from reporting their true beliefs.
For example, a sell side analyst is often paid to write a report on a public company. But their employer is often paid by the company. You can see how the waters can quickly become muddied with conflict. There are rules against conflicted research, of course, but…you know. Things happen.
But even if the process is transparent, readers of these reports must trust the analyst because the final valuation is normally a result of growth forecasts, which can come from an analyst’s emotional intelligence. Some of these forecasts can be unrealistic or can be far too conservative.
For example, a more aggressive analyst forecast for Woolworths’ supermarkets may result in a price target that is 10% higher than that of another analyst. Is that right or wrong? Who knows.
What are Woolworths shares really worth?
In my opinion, Woolworths’ shares are around fair value. That is, I agree with the analysts in that they are not meaningfully over or undervalued. To get to this view, I believe the company will struggle to widen its profit margins in supermarkets given the competitive threat of Coles and Aldi.
Moreover, Woolworths’ Big W is facing a stronger Kmart and the arrival of Amazon.
At current prices, Woolworths shares will stay on my watchlist.