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Analysis: is the Woolworths share price a buy?

The Woolworths Group Ltd (ASX: WOW) share price has climbed 6.2% higher this year, but is the ASX 20 share a good buy?

What industry does Woolworths operate in?

Whilst we all basically know what Woolies does, for investment purposes the Aussie supermarket is classified as operating in the Consumer Staples sector. More specifically, its Global Industry Classification Standard (GICS) industry group is Food & Staples Retailing.

That’s largely due to the company’s flagship Woolworths Supermarkets business. I think that’s a pretty fair analysis given the group’s Australian and New Zealand food segments contributed more than 75% of its half-year revenue in FY 2020.

What’s been happening to the Woolworths share price?

As mentioned, the Woolworths share price has climbed 6.2% higher in 2020. Woolies certainly wasn’t immune from the March bear market, but also didn’t rocket higher like some of its competitors’ shares.

I think one big factor contributing to the company’s share price was its large hotels business, ALH Group. Tight coronavirus restrictions have affected patronage in the hospitality industry which has significantly impacted revenues for the group.

I also feel tough conditions for retail have weighed on investors’ minds given the group’s ownership of the Big W chain.

The Woolworths share price has had a bullish run in the last couple of months, however, with the supermarket giant’s shares up 12.7% since 22 May. 

Given the S&P/ASX 200 Index (ASX: XJO) is down 11.4% this year, Woolies has outperformed the benchmark index by 17.6%.

Who are the major competitors?

Obviously, the major competitor that springs to mind is Coles Group Ltd (ASX: COL). Coles is Woolworths’ major supermarket competitor, with the two operating a duopoly of sorts within the industry (albeit with Aldi and IGA snapping at their heels).

However, Woolworths is a conglomerate. As well as food, and the aforementioned hotels and retail businesses, Woolworths has a sizeable liquor business. Endeavour Drinks generated $4,775 million in FY20 half-year revenue with a portfolio of prominent brands like Dan Murphy’s and BWS.

Given its conglomerate status, Wesfarmers Ltd (ASX: WES) is arguably a better comparison to Woolwoths. Wesfarmers sold off another $1.1 billion stake in Coles (leaving it with a 4.9% interest) but has interests in many different businesses.

In fact, Wesfarmers’ current portfolio includes household hardware (Bunnings), retail (Kmart and Officeworks), Chemicals, Industrials and others.

The Wesfarmers share price is up 9.8% this year while the Coles share price has rocketed 18.0% higher.

Is the Woolworths share price a buy?

Whilst devastating for large parts of the economy, overall the COVID-19 pandemic has been positive for ASX supermarkets. With Aussies spending considerably more time at home, the supermarkets are very much an essential part of our economy right now. Naturally, this has been good for earnings.

The Woolworths share price has done well to climb higher but currently trades at a price to earnings (P/E) ratio of 19.2. That’s very similar to Coles (19.9) and cheaper than Wesfarmers (23.6).

Factoring in a conglomerate discount compared to Coles as a pure supermarket play, I don’t think Woolies shares are particularly cheap right now.

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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET, Wesfarmers Limited, and Woolworths Limited. 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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