Woolworths share price drops lower on broker downgrade

The Woolworths Group Ltd (ASX:WOW) share price has dropped lower after being downgraded by a leading broker. Here's what you need to know…

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The Woolworths Group Ltd (ASX: WOW) share price is on course to make it two consecutive days of declines on Tuesday.

In morning trade the conglomerate's shares are down almost 1% to $29.68.

Why is the Woolworths share price in the red?

With no news out of the company, today's decline is likely to be attributable to a broker note released this morning.

According to a note out of Citi, its analysts have downgraded Woolworths' shares to a neutral rating from buy. The broker has also trimmed the price target on its shares by over 5% to $31.30 from $33.00.

Although Citi believes that trading conditions in the grocery industry will have been strong through the Christmas trading period and remain favourable today, it has downgraded its shares largely for valuation reasons.

Interestingly, rival Wesfarmers Ltd (ASX: WES) has also seen its share price fall by a similar amount on Tuesday after Goldman Sachs downgraded its shares to a neutral rating from buy.

As I explained in more detail here, Goldman downgraded Wesfarmers' shares due to concerns over the outlook of its key Bunnings business over the short and long term.

The broker is concerned that the Bunnings business may underperform due to unfavourable weather and the macroeconomic environment in home improvement deteriorating more rapidly than anticipated.

In addition to this, the broker isn't convinced that the Bunnings store network can grow as much as management believes and feels it is approaching a saturation point.

Should you buy Woolworths shares?

I agree with Citi on Woolworths and believe its shares are fully valued now.

As a result, I would sooner be a buyer of Coles Group Ltd (ASX: COL) shares instead. Not only does it give investors direct exposure to the grocery market, but its shares are arguably trading at a very attractive level in comparison to Woolies.

Incidentally, Citi has a buy rating and $14.50 price target on the supermarket giant's shares.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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 Scott Phillips.

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