The Woolworths Group Ltd (ASX: WOW) share price could be good value at current levels.
That's the view of the team at Goldman Sachs, which recently reiterated their buy rating and $40.50 price target on the company's shares and added them to the broker's coveted conviction buy list.
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Why does Goldman think that Woolworths shares are a strong buy?
There are three key reasons that Goldman Sachs is bullish on Woolworths' shares.
The first is the broker's belief that Woolworths will deliver strong earnings growth between FY 2022 and FY 2024. This is thanks to the strength of its key Australian supermarkets business. It said:
Superior growth in core business: we forecast CAGR of 6.6% and underlying NPAT of 14.1% over FY22-24e, with key driver being market share gain of AU Foods business at comp sales growth of FY23/24 8.8% and 6.6% respectively driven by effective cost-price pass through and additional mix improvement with relatively stable volume growth. This implies that EBIT margins will be well protected, and we forecast 50bps increase to 5.0% to FY24e.
Another reason for its positive stance is the retail media business. Goldman believes this relatively underappreciated business has a material growth opportunity with strong margins. The broker explained:
Adjacent revenues with higher margins: with a highly loyal consumer base and high frequency contact points, we believe that the retail media business is the next material growth lever for WOW. We have factored in A$1.1B sales, with 30% EBIT margin (unchanged) in 2030 and discounted value of A$4B adds ~6% to WOW's EV.
Finally, the broker sees value in the Woolworths share price at the current value and feels that a rerating to higher multiples is possible. It said:
Valuation re-rating: since 2018, WOW has traded at an average 1yr fwd P/E of 25.7x, vs COL (Neutral) of 21.6x, with average multiple premium of 4.0x. Currently, WOW is at 24.3x, with multiple premium at 1.8x, its lowest level since 2018, and we believe this is unwarranted as we see WOW to be still the superior operator with faster growth outlook. We expect better comps and margin management to become apparent, and the stock to re-rate.
