Woolworths Group Ltd (ASX: WOW) shares have tumbled 15% since late August, but it could be time to buy low on this supermarket giant.
Brokers have largely tipped the company as a buy following the recent share market decline, and Wilson Advisory seems to agree.
The team at Wilson Advisory released a report today on the commencement of the ASX annual general meeting (AGM) season.
The financial advisory firm said so far, there have been several prominent themes, including:
- Healthy consumer demand for retailers
- Early stabilisation for Woolworths
- Domestic housing strength
- Artificial Intelligence (AI) tailwinds
Woolworths stabilising
Wilson Advisory said major supermarkets continue to highlight a highly competitive environment.
It pointed to ongoing cost-of-living pressures as a key driver for value-seeking behaviour among households, prompting increased investment in price, private label goods and promotions.
It also said in its latest trading update, Woolworths has shown early signs of stabilisation after a period of market share losses to Coles (COL).
In Q2 to date, the supermarkets Australian Food segment has delivered sales growth of 3.2% (up from 2.1% in Q1).
According to the Wilson Advisory, this has narrowed the gap with Coles.
While it is too early to call a sustained turnaround, WOW's improving trajectory suggests trading conditions are stabilising and that its two-year downgrade cycle may be nearing an end.
WOW offers clear valuation support at current levels, trading on a forward P/E of 21.4x – a ~5% discount to Coles (COL) versus its historical ~15% premium (which has been warranted by its superior scale, market leadership and brand strength in our view).
Wilson Advisory said consensus now expects comparable sales growth to outpace COL in Q2.
Both companies offer solid medium-term growth outlooks according to Wilson Advisory, with Woolworths' three-year EPS CAGR of 11% slightly ahead of Coles' 10%.
Supermarkets at a discount to retailers
Wilson Advisory maintains a positive outlook on the supermarket sector.
It views it as nearing an earnings inflection point following challenges such as competition, inflation, regulation, and weak household spending.
It expects improving consumer sentiment to boost grocery spending, supporting double-digit EPS growth over the medium term.
Despite this growth potential, supermarket valuations remain reasonable, trading at around 20× forward P/E (in line with the long-term average) versus 32× for the broader retail sector, which is trading at a 60% premium to its norm.
Based on this, supermarkets are trading at roughly a 30% discount to other retailers while offering similar EPS growth prospects.
Overall, this combination of strong growth potential and attractive relative value makes supermarkets a compelling investment opportunity, with WOW our moderate preference on valuation grounds.
