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Is the Woolworths share price a buy?

Is the Woolworths Group Ltd (ASX: WOW) share price a buy?  

Investors have been hitting the buy button on Woolworths shares this year, with the Woolworths share price rising by 22% over the year so far in 2019.

It has been a busy year for Woolworths. In just the past two months Woolworths has formed a partnership with Marley Spoon AG (ASX: MMM) and also announced the merger and subsequent separation of its Endeavour Drinks and hotel business (ALH) from Woolworths.

Can a business shrink itself to greatness? Investors seem to think the answer is yes for Woolworths. The company has been winning the supermarket war over the past two years against Coles Group Limited (ASX: COL), and popular initiatives like the current Lion King toys could continue to make customers choose Woolworths over Coles.

Supermarkets are undoubtedly defensive businesses with potential for slow-and-steady growth as the Australian population rises. I’ve been impressed by Woolworths’ decent sales growth despite price deflation of products in the supermarkets.

Over the past few years we have seen Woolworths exit Masters, sell its petrol business to EG Group and soon the hotels, Dan Murphy’s, BWS and other liquor businesses will be gone.

All that will be left is Woolworths supermarkets and Big W. I worry that shorter-term value creation is meaning that all of Woolworths’ earnings eggs are being put in the one supermarket basket.

What happens if Aldi, Lidl, Costco, Amazon and other low-price competitors continue to grow their presence across Australia and steal market share from the big two supermarket operators?

I can understand investors being drawn to a defensive business like Woolworths with interest rates falling so low, but I don’t see Woolworths as having such a strong economic moat like an airport, tech service or other unique product.

Foolish takeaway

Woolworths is trading at 26x FY20’s estimated earnings. I think this is too expensive considering how slow growth is likely to be over the medium-term and how competition is growing. I believe there are better investment ideas out there.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 Scott Phillips.

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