Woolworths Group Ltd (ASX: WOW) shares have dropped so much that the supermarket business is now lower than it was compared to just before COVID panic smashed the ASX share market.
The company has seen its share price drop around 15% from mid-August. It's down around 20% since August 2021.
That's quite a lot of volatility for an ASX share that is typically defensive and doesn't see much change in sales over time.
After such a hefty drop for the company, is it now time to buy?
Latest business update
I think it's a good idea for investors to pay attention to whether conditions are worsening for the business. If a sell-off occurs but the company's performance isn't dropping, then it could be an oversold opportunity.
The latest update was the first quarter of FY23. Woolworths said group sales increased 1.8% to $16.36 billion. Within the divisions, there was a mixed performance.
Australian food sales were down 0.5% year over year to $12.2 billion, despite a 7.3% increase in average prices. Australian businesses-to-business sales grew by 26% to $1.2 billion, New Zealand food sales dropped 8.1% to $1.8 billion and Big W sales grew by 30.1% to $1.2 billion.
So, while total sales did go up, the key division (Australian supermarkets) saw sales go slightly backwards despite inflation. Is the Woolworths share price worth a high price-to-earnings (P/E) ratio if supermarket sales are going backwards? Probably not as much.
However, the company did say that in October, year over year "sales growth trends in Australian food have improved" as it's no longer cycling against lockdowns in NSW and Victoria.
Earnings diversification play
Last month, the business announced it was selling a significant portion of its Endeavour Group Ltd (ASX: EDV) shares (5.5% of the business) to buy 55% of Petspiration Group.
The acquisition cost of the majority stake of the PETstock owner is $586 million. It has 276 stores, online websites, a 2.4 million member program, and own-brand ranges.
There are a number of areas where Woolworths thinks it can help PETstock grow including digital and e-commerce, the supply chain, advanced analytics, and its balance sheet.
Woolworths believes this investment can achieve an internal rate of return (IRR) in the "mid-teens".
In the 12 months to September 2022, Petspiration generated earnings before interest, tax, depreciation and amortisation (EBITDA) of $158 million, meaning the acquisition price puts the enterprise value at 11x the EBITDA.
I think this is a smart move by the company.
Is the Woolworths share price a buy?
Woolworths is getting closer to its 52-week low. While it's impossible to say how low the company's share price is going to go, I believe it could be fruitful to look at the business while investor confidence is low.
As the saying goes, it's good to be greedy when other investors are fearful. Even so, the Commsec profit projection puts the Woolworths share price at 24x FY23's estimated earnings.
Woolworths shares would not be at the top of my own shopping list, but for investors interested in the company it seems like an opportunistic time to invest.
