Concerns about the supermarket industry could be overdone according to analysts at Goldman Sachs.
Its analysts note that "investor sentiment on supermarkets has been soft calendar year to date."
However, the broker is "more optimistic vs the market" and feels now is a great time to snap up Woolworths Group Ltd (ASX: WOW) shares.
What did Goldman say about supermarkets?
There have been two dark clouds hovering above Woolworths and other supermarket operators in recent months. One is the regulatory review of the industry, and the other is concerns over negative jaws. In respect to the regulatory review, Goldman said:
Regulatory review headwind on Supermarkets benign to date with latest Senate Inquiry recommendations largely expected by the market and the adoption of the mandatory code of conduct with suppliers to not materially impact current ways of working (note the ACCC inquiry is still ongoing). Our earlier report showed the last supermarket inquiry resulted in immaterial EPS impacts for WOW and MTS. Similar to what we observed in 2008, WOW began re-rating post trough in May 2024, ~ T+80-100 days after the announcement of ACCC/Senate inquiry.
As for negative jaws, which is a term to describe costs rising quicker than sales, the broker feels this concern is overdone. It explains:
"Negative Jaws" concern overdone as our analysis and channel checks suggest still resilient ~3% industry topline supermarket growth from improving volume and positive response on NPD while there are ample levers for GPM expansion through business model mix (eComm and Retail Media) and margin optimisation levers (NPD, Private Label, Cost-Out) to offset still mid-single digit opex inflation. Net net, we expect across the 3 stocks ~2-4% EBIT growth in FY25 then to accelerate to ~6-8% CAGR for FY24-27e.
Buy Woolworths shares
In light of the above, the broker has reiterated its buy rating with an improved price target of $40.20.
Based on the current Woolworths share price of $34.06, this implies potential upside of 18% for investors over the next 12 months. Goldman concludes:
Based on GS latest forecasts, we observe WOW is trading at a 12m forward PE of 22.7x vs historical avg (since 2016) of 23.6x while COL is trading 21.4x 12m forward PE compared to avg since listing of 21.5x. This 1.3 PE point premium for WOW relative to COL compares to LT avg of 4.1. Given WOW 8.2% EPS CAGR for FY24-27e vs COL of 6.5%, we believe this represents an attractive buying opportunity for WOW.
