Are Woolworths shares dirt cheap following the selloff?

Is now the time to pounce? Let's see what one leading broker thinks.

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Woolworths Group Ltd (ASX: WOW) shares are trading lower again on Thursday.

At the time of writing, the supermarket giant's shares are down 1% to $33.17.

This means that its shares are now down 8% over the last two trading sessions.

Investors have been hitting the sell button in response to a softer than expected half-year result and news that its CEO, Brad Banducci, has fallen on his sword and is quitting the role later this year.

Should you buy Woolworths shares?

The team at Goldman Sachs believes this recent weakness has created a buying opportunity for investors.

According to a note from this morning, the broker has retained its conviction buy rating with a trimmed price target of $40.40. This implies potential upside of 22% for investors over the next 12 months.

And with the broker forecasting a fully franked 3.3% dividend yield in FY 2024, the total potential return stretches beyond 25%.

What did the broker say?

Goldman was a touch underwhelmed with Woolworths' results but saw enough to remain positive on the company. It explains:

WOW reported 1H24 with +10% EBIT in AU Foods YoY the key bright spot, though this was dragged by weaker-than-expected H2 first 7 weeks AU Foods sales growth of +1.5% and further guidance of a slower EBIT growth in 2H. Additionally, the ongoing ACCC pricing inquiry and earlier-than-expected announcement of CEO Brad Banducci's retirement weighed on the share price.

Goldman also believes the above overshadowed its new growth engine – the Woolies X business. It said:

Woolies X the scaling new growth engine: The segment (eCom + Digital & Media and Rewards & Services and Homerun) grew DAP by A$96mn vs. pcp, contributing to 68% of 1H24 AU Foods EBIT growth. This has been central to our Buy thesis – that the continued scaling of the company's omni-channel offer and advanced data and analytics capabilities to drive high growth/high margin ancillary services such as Retail Media will drive strong growth and returns above peers.

In 1H24, eCom DAP margin reached 3.2% and Digital Media DAP margin (on external revenue) reached 36.3%. Our channel checks suggest that WOW leads this growth lever by multiple years and management confirmed that eComm sales has larger baskets, higher GPM (due to long-life products skew).

All in all, the broker believes now could be an opportune time to snap up a high-quality company and a great price.

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 positions in and has recommended Goldman Sachs Group. 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 Scott Phillips.

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