Woolworths shares are 'fully valued' and investors should buy Coles instead: broker

Woolworths shares may be fully valued according to one broker…

Woolworths Group Ltd (ASX: WOW) shares are having a subdued start to the week.

In afternoon trade, the retail giant's shares are trading largely flat at $32.56.

This compares unfavourably to the ASX 200 index, which is up over 0.4% at the time of writing.

A man in a supermarket strikes an unlikely pose while pushing a trolley, lifting both legs sideways off the ground and looking mildly rattled with a wide-mouthed expression.

Image source: Getty Images

What's going on with Woolworths' shares?

Investors have been holding off buying Woolworths shares after brokers responded somewhat negatively to the company's first quarter update.

In case you missed it, last week Woolworths released a sales update for the three months ended 2 October. That update revealed that the company delivered a 1.8% increase in group sales to $16,363 million.

However, rather than its supermarkets business driving the growth, it was (unexpectedly) the Big W and Australian B2B businesses doing the heavy lifting. In fact, the key Australian Food business reported a 1.1% comparable store sales decline for the period.

This was particularly surprising given that its rival Coles Group Ltd (ASX: COL) reported a 2.1% increase in comparable store sales for the same period.

What are brokers saying?

The team at Morgans wasn't overly impressed. In response, the broker has retained its hold rating and cut its price target on Woolworths shares by 8.5% to $34.10. This implies modest upside from current levels. Morgans commented:

Woolworths' 1Q23 sales trading update overall was weaker than we expected. LFL sales: Australian Food -1.1% (vs MorgansF +0.2%), NZ Food -3.3% (vs MorgansF -0.5%) and BIG W +29.9% (vs MorgansF +25.0%).

However, the broker acknowledges that management has revealed that sales trends have improved in October.

Management said year on year sales growth trends in Australian Food have improved in October as the business cycles out of the NSW and VIC lockdowns of last year, with the 3-year sales growth rate broadly in line with 1Q23.

Nevertheless, its analysts just don't see enough value in Woolworths shares to be able to recommend them as a buy and prefer rival Coles. They conclude:

Our target price decreases to $34.10 and we maintain our Hold rating. Trading on 23.5x FY23F PE and 3.1% yield we continue to see the stock as fully valued and continue to prefer Coles in the Staples sector.

Morgans has an add rating and $19.50 price target on Coles' shares.

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 positions in and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Consumer Staples & Discretionary Shares

Three cows jumping over a field of grass.
Consumer Staples & Discretionary Shares

A2 Milk vs Bega Cheese: Which ASX dairy stock is better for new investors?

Which company edges ahead thanks to fully franked dividends and recent share price momentum?

Read more »

A man in a four wheel drive vehicle lifts an arm and gives a thumbs up in the air as he traverses rugged mountain style terrain with a green valley and rocky hills in the background.
Consumer Staples & Discretionary Shares

ARB posts profit and sales drop but holds dividend steady

ARB reveals lower FY26 revenue and profit but keeps dividend steady, focusing on new store growth and international expansion.

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Consumer Staples & Discretionary Shares

3 reasons I would invest $10,000 in Coles shares

Defensive demand is only one reason this ASX share remains high on my buy list.

Read more »

Woman thinking in a supermarket.
Consumer Staples & Discretionary Shares

Buying Coles shares? Here's the dividend yield you'll get today

Coles has impressed dividend investors with its income growth.

Read more »

Hand sketching investment growth concept chart with chalk on blackboard.
Consumer Staples & Discretionary Shares

Temple & Webster vs Harvey Norman: Which beaten-down ASX retailer offers better value?

Temple & Webster vs Harvey Norman—here's which value investors might want to back after a tough year for retail shares.

Read more »

A young woman looks happily at her phone in one hand with a selection of retail shopping bags in her other hand.
Consumer Staples & Discretionary Shares

Woolworths vs JB Hi-Fi: Which ASX shares to buy now?

Which is the better buy right now: Woolworths’ steady staples or JB Hi-Fi’s value and yield? Here’s my verdict for…

Read more »

Woman holding several shopping bags.
Consumer Staples & Discretionary Shares

Super Retail Group vs JB Hi-Fi: Which retail stock is better for beginners?

Which comes out on top for beginners: Super Retail Group or JB Hi-Fi? We crunch the numbers and explain my…

Read more »

An old dude with a long flowing beard smiles as he bites into a Mexican burrito.
Consumer Staples & Discretionary Shares

Guzman y Gomez in focus as Q1 FY27 sales jump 18.8%

Guzman y Gomez reported 18.8% sales growth and robust expansion plans in its Q1 FY27 update.

Read more »