Are Woolworths shares a bargain after falling 20%?

Is it time to put Woolworths stock in our share shopping basket?

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The Woolworths Group Ltd (ASX: WOW) share price is down around 20% from June 2023, as we can see on the chart below. When an ASX blue-chip share falls as much as that, it's worthwhile to examine if it's a potential opportunity.  

It's an interesting time for the ASX supermarket share because it's meant to be defensive, yet the market has really turned off the business at a time when some discretionary areas of the Australian economy are suffering.

Should the market be negative about the business? I'll examine some negatives and positives.

Inflation and sales are weakening

In 2023, the company was benefiting from strong tailwinds with a high level of food inflation and a rapidly growing Australian population.

Woolworths reported in FY23 that its Australian food sales increased 5% to $48 billion, with FY23 second-half sales rising 7.6% to $23.5 billion. Woolworths reported inflation of average prices was 7.7% in the FY23 second quarter, 5.8% in the third quarter and 5.2% in the fourth quarter.

The recent FY24 third quarter showed much slower progress for Woolworths, where the Australian food division only achieved 1.5% total sales growth after a 0.7% decline in average prices (excluding tobacco). It also didn't help investor confidence that BIG W sales declined by 4.1% to $1 billion.

Woolworths said it's expecting trading conditions to be "challenging" for the next 12 months due to competition for customer shopping baskets, and inflation returning to a "very low single digit range". 

What's attractive about the Woolworths share price?

For starters, the lower valuation is now much more appealing with a lower price/earnings (P/E) ratio.

The broker UBS projects Woolworths could generate $1.32 of earnings per share (EPS) in FY24, which puts it below 25x FY24's forecast profit.

Pleasingly, Woolworths is expected to deliver significant earnings growth in the coming years. By FY27, EPS is projected to increase to $1.57 and then increase to $1.74 in FY28.

I'm a big believer that earnings growth can drive share prices, so the potential 32% rise in EPS could be supportive for the Woolworths share price in the next few years.

The Woolworths dividend per share is also expected to grow from 96 cents in FY24 to $1.30 per share in FY28. Those potential payouts translate into a grossed-up dividend yield of 4.2% in FY24 and 5.7% in FY28.

Ultimately, shareholder returns depend on share price movements and dividend payouts, and growth looks positive in the coming years, even if the shorter term looks weak. I think this could be the right time to consider Woolworths shares.

Motley Fool contributor Tristan Harrison 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 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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