Woolworths (ASX:WOW) share price higher on bullish broker note

Woolworths shares are in the buy zone according to Goldman Sachs…

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Key points
  • Woolworths shares are pushing higher on Monday.
  • This appears to have been driven by a bullish broker note out of Goldman Sachs.
  • Goldman sees decent upside for the retail giant's shares from current levels.

The Woolworths Group Ltd (ASX: WOW) share price is pushing higher on Monday morning.

At the time of writing, the retail giant's shares are up almost 1% to $36.56.

green arrow rising from within a trolley.

Image source: Getty Images

Why is the Woolworths share price rising?

Investors have been bidding the Woolworths share price higher today following the release of a broker note out of Goldman Sachs.

According to the note, the broker has initiated coverage on the company's shares with a buy rating and $40.50 price target.

Based on the current Woolworths share price, this implies potential upside of almost 11% for investors over the next 12 months.

Goldman is also forecasting a 93 cents per share fully franked dividend in FY 2022 and then 111.4 cents per share in FY 2023. Adding the former into the equation brings the total return on offer to approximately 13.5%.

What did the broker say?

Goldman is positive on the Woolworths share price due to three key reasons. These are its digital consumer strategy, alternative revenue streams, and its defensive qualities in an inflationary environment.

In respect to its digital strategy, Goldman commented: "We expect the transition to omni-channel sales to be a critical next step in competition, even after COVID. Per our proprietary "Digital Readiness Scorecard", WOW is the most advanced in its digitalization efforts, as evidenced through its online penetration (~10% as of FY22) and 13.3m Everyday Rewards Members and significant ~12m digital traffic weekly, materially outperforming peers."

As for alternative revenue streams, the broker believes media services could be a major source of revenue in the future.

It explained: "Media services, where retailers' digital assets (including APP, website, email etc.) can act as ad platforms for its vendor brands, is one such potential, with early success seen in US peers (Walmart and Kroger). As long as the retailer can provide the brands with a target audience and high quality touch points with personalized media exposure and measured returns (with higher ROI than other mass media allocation), brands will likely shift spend onto the platform. As part of our DCF, we forecast that by 2030, WOW will be able to deliver A$1B revenue at ~30% EBIT margin for the Media business, which appears conservative compared to Walmart and Kroger delivering ~60% EBIT margin."

Finally, Goldman is positive on the Woolworths share price due to the company's defensive qualities in an inflationary environment.

It said: "WOW, being the largest grocer in Australia at ~35% market share as of FY21, has demonstrated historical success in managing through commodity inflation via a series of levers including price pass-through, mix improvement and cost efficiency initiatives. We expect that it will have strong pricing power and scale advantage to manage well through this cycle."

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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