Why you should buy cheap Woolworths shares before it's too late

Goldman Sachs thinks investors should be snapping up the supermarket giant's shares.

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Woolworths Group Ltd (ASX: WOW) shares have come under pressure this year.

So much so, the supermarket giant's shares are down 14% year to date and trading within a couple of cents of a 52-week low at $32.07.

A portion of this decline can be attributed to concerns over the launch of a number of industry body inquiries into price gouging and anti-competitive behaviour claims. This includes the ACCC Supermarket Inquiry and the Senate Select Committee on Supermarket Prices.

The good news is that analysts at Goldman Sachs are not concerned about the inquiries and see the recent weakness as a buying opportunity.

Woolworths shares are great value

The broker has been looking at the potential impact from the aforementioned inquiries. It notes that similar inquiries over a decade ago had no real impacts on its earnings. It commented:

The 2008 ACCC inquiry concluded that the supermarkets industry was "workably competitive" and hence the recommended industry changes did not result in a material impact to WOW earnings. Notably, WOW Factset consensus forecasts for NTM EPS increased 12% T+0 to T+260 days.

In addition, it highlights that the previous inquiry put pressure on Woolworths shares, but not to the same extent as this time around. As a result, it appears to feel that the market has overreacted this time around. It adds:

WOW's 2008 inquiry saw its share price underperform ASX200 by ~15-20% in T+80 to T+120 days largely due to PER compression. 2 weeks post the conclusion of the ACCC inquiry findings, WOW's share price recovered -2% vs ASX 200. Currently, WOW's underperformance vs ASX 200 since the Dec 6 Senate Inquiry announcement is 21%, PER premium vs ASX200 is at ~29%.

'Sufficiently priced in'

In light of the above, the team at Goldman Sachs believes that "WOW's earnings and valuation risks from the Inquiries are sufficiently priced in and reiterate Buy (on CL)."

As well as its conviction buy rating, Goldman has retained its $40.40 price target on the company's shares. Based on its current share price, this implies potential upside of 26% for investors over the next 12 months.

The broker is also forecasting a $1.09 per share fully franked dividend in FY 2024. This represents a 3.3% dividend yield, which boosts the total potential return beyond 29%.

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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