How Much Are Woolworths Limited Shares REALLY Worth?

After all, it’s not everyday you are able to buy Australia’s most profitable supermarket chain for a 26% discount to its price a year ago. Woolworths talk about price within the last 12 months. Personally, I’m on record as saying Woolworths makes up about 9.5% of my entire 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% – completely franked believe it or not.

Given the dependability of Woolworths’ dividend and the current low-interest rate environment, it makes sense to at least consider owning some stocks in your profile. Is it good value? Before crunching the figures on valuation, it’s vital to know the business enterprise you’re getting ready to buy shares in and – most importantly – be cognisant of the risks. You don’t need to be an analyst with a flashy suit to recognize risks and understand a small business like Woolworths.

Woolworths stocks have fallen because traders and analysts have become worried about competitive dangers from key rival Coles – owned by Wesfarmers Ltd (ASX: WES) – as well as international giants Aldi, Lidl, and Costco Wholesale Corp. However, Roy Morgan research from 2014 found that Woolworths and Coles control 74% of the neighborhood supermarket space.

It also said German giant, Aldi, controlled 10% of the market, having displaced Metcash Limited’s (ASX: MTS) IGA stores with 9.5% talk about. The rest is composed by independents. Year 2014 In financial, Woolworths’ Australian Food, Liquor and Petrol department accounted for 79% of group profits. Historically, its EBIT margin has been quite robust 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. Home Improvement) because they’re funding structures can vary. For example, Masters is part-owned by Lowe’s of America whereas BIGW is not. EBIT makes their earnings comparable. 100 spent in store. Here’s the actual margins appear to be over the group, and what I expect in the foreseeable future.

Woolworths historical margins and my forecasts. Obviously, any significant margin pressure across Woolworths’ supermarkets will have a serious impact at the group level considering that such a sizable proportion of earnings stem from supermarkets. You’ll take note from the above mentioned graph however I’ve forecast falling group margins until 2017. Around that time I believe we’ll likely start to see the Home Improvement division – specifically Masters – start making a profit.

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It doesn’t really matter to me if it breaks even in 2017, 2018 or 2019 because I’m a long-term buyer. Moreover, I’m confident it’ll turn a profit ultimately. So what are Woolworths stocks well worth? 19.87 regarding to my reduced cash flow model. We can provide a more solid valuation of Woolworths stocks by incorporating the current market valuations of its peers and fellow ASX-listed shares with similar qualities.

The market’s implied valuations of Costco, Telstra Corporation Ltd (ASX: TLS), Woolworths and Wesfarmers can be found 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, taxes, depreciation and amortisation (EBITDA) model offers a fairer estimate of the marketplace value for Woolworths shares. 38.81, according to the EV/EBITDA model.