The Woolworths Group Ltd (ASX: WOW) share price will be one to watch closely on Tuesday.
This follows the release of a broker note out of Goldman Sachs this morning.
According to the note, Goldman Sachs believes the Woolworths share price is fully valued now following recent outperformance and its demerger.
As a result, the broker has downgraded the company’s shares to a neutral rating and trimmed the price target on them to $36.80.
Based on the current Woolworths share price of $37.85, this implies potential downside of 2.8% over the next 12 months excluding dividends. And including its forecast 2.3% dividend yield, the total potential return is -0.5%.
What did Goldman Sachs say?
Goldman made the move after updating its valuation to account for the Endeavour Group Ltd (ASX: EDV) demerger that took place last week. The broker also notes that the Woolworths share price has vastly outperformed the market since it rated the retail giant as a buy.
The broker said: “Overall, we revise our underlying NPAT forecasts by -23.8% and -25.7% respectively in FY21 and FY22. We note that we do not include any Buyback within our revised forecasts.”
Based on the broker’s forecasts, this means that the Woolworths share price is trading at an estimated 32x FY 2022 earnings at present. Which Goldman appears to believe limits any potential upside from here.
“Compared to latest close of A$37.85, our revised 12m Target Price of A$36.80 offers a total potential return of -0.5%. While the short-term catalyst of an off-market buyback remains in play, we are taking advantage of the current strength in WOW to downgrade to Neutral. Since we upgraded WOW to a Buy rating on 7 March 2021 the share price has appreciated 14.1% prior to the demerger vs. the market up +8%,” the broker concluded.