How Much Are Woolworths Limited Shares REALLY Worth?

After all, it’s not everyday it is possible to buy Australia’s most profitable supermarket string for a 26% discount to its price this past year. Woolworths share price within the last 12 months. Personally, I’m on record as saying Woolworths makes up about 9.5% of my whole share portfolio, having topped up…twice recently! As the rapid falls in share price have taken place, Woolworths’ forecast dividend yield has blossomed to over 5.1% – fully franked believe it or not.

Given the reliability of Woolworths’ dividend and the current low-interest rate environment, it seems sensible to at least consider buying some shares in your stock portfolio. Is it good value? Before crunching the figures on valuation, it’s essential to know the business you’re preparing to buy stocks in and – most of all – be cognisant of the potential risks. You don’t have to be an analyst with a flashy suit to recognize risks and understand a small business like Woolworths.

Woolworths shares have dropped because traders and analysts have grown worried about competitive risks from key rival Coles – possessed by Wesfarmers Ltd (ASX: WES) – as well as international giants Aldi, Lidl, and Costco Wholesale Corp.. However, Roy Morgan research from 2014 discovered that Woolworths and Coles control 74% of the local supermarket space.

It also said the German giant, Aldi, managed 10% of the marketplace, having displaced Metcash Limited’s (ASX: MTS) IGA stores with 9.5% talk about. The rest is made up by independents. In financial year 2014, Woolworths’ Australian Food, Liquor, and Petrol department accounted for 79% of group earnings. Historically, its EBIT margin has been quite sturdy too. EBIT, or earnings before taxes and interest, is a financial measure this means profit, before taking into account the way the business is funded.

EBIT is the best way to gauge the profitability of specific business lines (e.g. DO-IT-YOURSELF) because they’re financing structures can vary. For example, Masters is part-owned by Lowe’s of America whereas BIGW is not. EBIT makes their profits comparable. 100 spent in store. What the margins look like over the group Here’s, and what I expect in the future.

Woolworths historical margins and my forecasts. Obviously, any significant margin pressure across Woolworths’ supermarkets will have a serious effect at the group level considering that such a huge proportion of income stem from supermarkets. You’ll notice from the above graph, I’ve forecast falling group margins until 2017 however. Around that time I believe we’ll likely start to see the DO-IT-YOURSELF division – specifically Masters – start making a profit.

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It doesn’t really matter if you ask me if it breaks even in 2017, 2018, or 2019 because I’m a long-term trader. Moreover, I’m confident it’ll turn a profit sooner or later. So what are Woolworths stocks worthy of? 19.87 relating to my reduced cashflow model. We can provide a stronger valuation of Woolworths stocks by incorporating the existing market valuations of its peers and fellow ASX-listed stocks with similar qualities.

The market’s implied valuations of Costco, Telstra Corporation Ltd (ASX: TLS), Woolworths, and Wesfarmers are available below. Some financial commentators use the P/E Ratio to provide a relative valuation to shares. Using the Enterprise Value (EV) to cash flow before interest, fees, depreciation, and amortization (EBITDA) model offers a fairer estimation of the marketplace value for Woolworths shares. 38.81, based on the EV/EBITDA model.