Is Woolworths a Buy now?

A number of Australia’s top investment banks remain divided on the outlook for Woolworths.

Sales remain strong, Big W a standout

In many ways, the coronavirus pandemic has proven highly beneficial for many of Australia’s iconic supermarkets, with the likes of Metcash, Coles and now Woolworths all seeing particularly strong sales growth, in their Food segments, since the pandemic began.

In a trading update released this week, Woolworths revealed that sales momentum has remained strong during the fourth quarter, with the Group’s Australian Food segment growing 8.6%, New Zealand Food sales rising 15.1%, Big W sales surging 27.8%, while Endeavour Drinks saw its sales increase 21.4% – on a quarter-to-date basis.

Yet with these stronger sales have also come elevated costs, primarily related to increased cleaning requirements, social distancing practices and the need for increased supply chain flexibility. FY20 incremental costs as a result of Covid-related expenses are expected to come in at between $220 million to $275 million.

Elsewhere, WOW also announced plans to develop two new distribution centres at Moorebank Logistics Park in Sydney – one automated and one semi-automated. The Woolworths CEO, Brad Banducci said these 'new facilities will advance our localised ranging efforts, with the ability to hold over 30% more products than existing facilities.'

Construction of the distribution centres is set to be completed by CY23.

Woolworths share price: The analyst take

According to the Wall Street Journal, the current analyst consensus on Woolworths (WOW) is Overweight. All up, the stock currently has five Buy ratings, one Overweight rating and five Hold ratings, according the WSJ.

Mind you, while the overall consensus on WOW is optimistic, the response to Woolworths' Q4 trading update from some of Australia's top investment banks was divisive.

For example, Macquarie and UBS both reiterated their bullish stance on the retail-focused conglomerate in the wake of this trading update. Macquarie retained their Outperform raing and price target of $40.50 per share, while UBS kept their Buy rating and but lowered their price target to $39.10.

UBS analysts remain optimistic for the long-term outlook for WOW, saying:

‘While one or two quarters of heightened sales and CODB are not material to the valuations of listed grocers: we believe WOW will exit COVID-19 stronger, with higher share, richer data and an opportunity to expand share of customer wallets long term.’

The investment bank's analysts added that Woolworths ‘will be well positioned given recent investments, and the acceleration in new online customers.’

Other investment banks appeared less optimistic in the wake of this trading update, with Goldman Sachs maintaining their Neutral rating and price target of $35.90 per share on WOW. Morgan Stanley also seemed unimpressed by the Q4 update, noting that leverage remains elusive; reiterating their Equal-weight rating and $36.00 price target.

While Morgan Stanley analysts believe 'Australian supermarkets are favourably poised given internal and exogenous drivers of operating leverage,' the investment bank ultimately prefers Coles over Woolworths due to its ‘defensive exposure, as [...] a ‘purer’ supermarket play with better yield.’

The Woolworths (WOW) share price last traded at $36.32 per share.

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