Is the Woolworths Group Ltd (ASX: WOW) share price a buy?
The Woolworths share price has risen by 14.3% over the past six months, which isn't bad for such a large business in a slow-growth industry.
The company, which is largely a supermarket business, may well soon only be a supermarket business by the end of next year after Woolworths recently announced that it intends to separate its Endeavour Drinks and ALH businesses after first combining the two.
It's funny how shrinking to greatness could be a winner for Woolworths shareholders. It may benefit investors in the near-term, but I'm not sure that Woolworths' earnings will be better off in the long run from a divestment.
Indeed, after the sale of Woolworths' petrol business to EG Group, Woolworths used the cash to fund a $1.7 billion off-market buy-back. Management didn't seem to think that it could utilise the cash within the business for future growth.
It's not as though Woolworths is completely devoid of new growth ideas though. It recently struck up a strategic partnership with Marley Spoon AG (ASX: MMM) which includes structured debt and equity funding.
However, I fear the tables are about to turn for Woolworths compared to Coles Group Limited (ASX: COL). The two have been switching momentum for a number of years and Coles may soon take back the initiative.
Being divested from Wesfarmers Ltd (ASX: WES) seems to have unleashed Coles to do a number of deals like its new agreement with Microsoft, the partnership with Ocado and Coles' planned automated distribution warehouses. Unless Woolworths does something to keep up, it may find Coles overtakes with the sales growth rate again.
Foolish takeaway
Woolworths is currently trading at 25x FY20's estimated earnings. I think this price is far too expensive to deliver market-beating returns over the longer-term with sales only growing by a few percent a year.
