Are Woolworths shares positioned for ‘a long-term, post-COVID trend?’

Woolworths has charged back north in recent weeks.

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A female Woolworths customer leans on her shopping trolley as she rests her chin in her hand thinking about what to buy for dinner while also wondering why the Woolworths share price isn't doing as well as Coles recently

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Key points

  • Woolworths shares have poked back into the green this past month after a difficult start to the year 
  • Brokers are positive on the stock and sentiment is biased towards the bulls 
  • In the last 12 months, the share price has gained just 3% 

Shares in Woolworths Group Ltd (ASX: WOW) have staged a comeback in March and rallied almost 5% in that time. The retail giant is set to open higher again today. On Tuesday, it finished the session with a splash in the green at $37.14.

Cyclical names such as Woolworths are clawing back gains after a frosty start to the year. In the last 12 months, the share price has gained just 3%. But with a recent shift in market tone, it appears investors are prepared to throw risk on the table once more.

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How did Woolworths go in March?

Analysts at UBS say that with the economy reopening again, consumer confidence for the next 12 months has touched record levels.

Findings from its 11th quarterly Evidence Lab consumer survey demonstrate that cost pressures are rising for consumers, despite growth in savings and asset values.

Curiously, JP Morgan noted the best consumer markets are found where young affluent types are densely populated in the large city areas of Australia.

That’s important for Woolworths as retailers are more exposed to this kind of consumer, with the conglomerate front and centre on many levels through its offering.

With a string of recent portfolio updates, the group isn’t showing any signs of slowing operations either. It recently unveiled its $184 million Heathwood Distribution Centre (DC), located a short way from the Brisbane CBD.

The venture is set to create more than 200 jobs during construction, Woolworths reports, plus approximately 300 jobs for Queenslanders, it says.

What’s the outlook?

Sentiment is mixed on the stock but tilted towards a buy right now. Exactly 50% of analysts covering it urge clients to buy, Bloomberg data shows. The remainder either say to hold or sell, whilst the consensus price target is $37.03.

Analysts at JP Morgan are bullish on the stock and rate it a buy to clients. It has four catalysts that it feels will form the bedrock of Woolworths’ growth in the coming years.

With inflation rearing its head in just about every pocket of the market, perishables like food are set to produce high operating cash flows for Woolworths, the broker says.

It also likes the group’s Everyday Needs segment, whilst Big W and the online platform are equally attractive catalysts to move the needle, it argues.

The firm values Woolworths at $39.50 per share which suggests more than a $2 per share upside if its thesis comes through.

Meanwhile, Mohsen Crofts, analyst at Bloomberg Intelligence, submits that Woolworths’ revenue is “set to establish long-term, post-COVID trend” in a recent note.

“Woolworths’ grocery-segment growth has been elevated during the COVID period but now looks set to normalize around its long-term trend of about 4% a year,” the analyst wrote.

“This represents population expansion of 1-1.5% and food-price inflation of about 2.5-3%,” he added.

“In the next two to three years, more competition from new entrants such as Aldi and Costco, and Amazon.com’s move into packaged food, have further potential to curb store-sales growth”.

Motley Fool contributor Zach Bristow 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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