A case for Woolworths

Catering to a higher LSM than its fellow sector companions, Woolworths has undoubtedly carved out a niche market for itself.

A 8.62% gain after its results release emphasizes the effectiveness of the current business model with gross profit margins improving on its clothing and merchandise sales, while sales of its food products were double that of the market in general. The planned expansion into Africa with a further 82 stores over the next 3 years is encouraging as Woolworths footprint has grown successfully in the past. The companies P/E ratio which is north of 20, shows that is priced for growth which it at present  is currently exceeding as evident in the results. The company increased its BBE preference dividend from R38million to R62million as well as a final dividend of 148cps which brings the total dividend to 234cps, an 18% increase from the year before.

Headline earnings per share rose 27.3%, which was towards the outer end of the forward guidance revealed via their previous trading statement. Interestingly enough, although we saw an initial gain after the trading statement, the share had subsequently fallen below the pre-trading statement level in sector sympathy as the likes of Shoprite and Massmart disappointed markets with their respective earnings.

The weakness provided an opportunity, for what is certainly (and with good reason) a market darling, for a stellar short-term rebound. However it also provides warning of how the market does often discount and forget news and finds correlation within its sector counterparts. One would think for a sustained rebound we would like to see some more encouraging news from its peers going forward.

Technically the price is rising with a resistance level anticipated at around 6850, a break of which could see a move towards 7200 -7300 region.

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