Are Woolworths shares dirt cheap?

One leading broker thinks investors should be buying this retail giant's shares.

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Woolworths Group Ltd (ASX: WOW) shares were sold off on Thursday.

So much so, that the retail giant's shares tumbled to a two-year low at one stage.

Investors were hitting the sell button in a panic in response to a disappointing third-quarter sales update which indicated that the company was losing market share to rival Coles Group Ltd (ASX: COL).

While this was disappointing, the team at Goldman Sachs thinks the selling has been overdone and has created a buying opportunity for investors.

Buy Woolworths shares

Commenting on the quarter, the broker said:

While WOW's 3Q sales were in-line with GSe, the stock traded weaker due to management seeing a challenging 12mth outlook with intensifying competition and low-single digit cost inflation. Additionally, the first time disclosure of A$90-100mn supply chain ramp up cost in FY25/26 (~3% of GSe F25/26e EBIT) dented investor confidence.

Nevertheless, it remains very positive on the investment opportunity here. Particularly given its belief that this is the trough in its market share losses. It adds:

That said, we stay positive on WOW as a digital growth leader, believing 3Q24 will be the worst of market share loss.

Big returns on offer

In response to the update, the broker has reiterated its conviction buy rating with a trimmed price target of $39.40 (from $40.40).

So, with Woolworths shares currently trading at $30.50, this implies a potential upside of 29% for investors over the next 12 months.

In addition, the decline in the company's share price has boosted the dividend yield on offer with its shares.

Goldman is now forecasting fully franked dividends of $1.08 per share in FY 2024 and then $1.14 per share in FY 2025. This represents 3.5% and 3.75% dividend yields, respectively, for investors. This boosts the total potential 12-month return beyond 33%.

To put that into context, a $20,000 investment would be worth approximately $26,600 in 12 months if Goldman Sachs is on the money with its recommendation.

'Value entry level'

Overall, the broker sees now as a great time to pick up Woolworths shares. It concludes:

WOW is the largest supermarket chain in Australia with an additional presence in NZ, as well as selling general merchandise retail via Big W. We are Buy rated on the stock as we believe the business has among the highest consumer stickiness and loyalty among peers, and hence has strong ability to drive market share gains via its omni-channel advantage, as well as its ability to pass through any cost inflation to protect its margins, beyond market expectations. The stock is trading below its historical average (since 2018), and we see this as a value entry level for a high-quality and defensive stock.

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 positions in and has recommended Coles Group. 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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