Why Woolworths is too expensive right now

Investors looking for value best stay away from Woolworths Group Ltd (ASX: WOW), according to one fund manager.

Pengana Capital Group Ltd (ASX: PCG) portfolio manager Chris Tan told The Motley Fool that the share price for the supermarket giant was expensive.

“If you look at it from a historical price-to-earnings point of view, it does look expensive,” he said.

Woolworths closed at $37.94 today, up more than 4% since the start of the year. The price to earnings (P/E) ratio is 41.

The Woolworths share price was trading as low as $20.56 in 2016.

But Woolworths is still a high quality business

Even though he thought it’s not currently good value, Tan would never bet against Woolworths.

“The thing is, it has really an unrivaled position in Australia in terms of it’s network, it’s ability — it’s the leader,” Tan said in this week’s Foolish Q&A.

“For a long time there were price wars with Aldi coming in, Coles Group Ltd (ASX: COL), and Woolworths — and now we believe there’s equilibrium in that market. Everyone’s in their lane.”

Tan also believed Woolworths has already made the necessary investments into its operations, while its rivals have to play catch-up.

“Their competitors need to invest a lot more heavily than Woolworths do and this whole COVID-19 episode has really played into their strengths,” he said.

“We can see some food inflation coming back and just stronger demand for longer for groceries.”

Supermarkets will have a merry Christmas

Research firm IBISWorld this week forecast that Australian retailers would struggle in the coming Christmas season. 

But supermarkets would buck this trend.

“Families are expected to go all-out on their Christmas feasts this year, with many Australians celebrating their ability to reunite with family after states reopen borders and ease social distancing regulations,” said IBISWorld senior industry analyst Yin Yeoh.

The reasoning is that almost all Australians would stay in the country rather than head overseas for a holiday. 

Spending would hit $11.1 billion in December, according to IBSWorld, which is a 2.8% increase year-on-year.

Hotels business sell-off could be on again

Woolworths’ attempt to sell off its hospitality arm in the second quarter this year was scuttled. But Tan sees this as an eventuality, and a potential upside for investors.

“That will be back on track sometime next year, probably in calendar year ’21. (This) will leave Woolworths much better, more focused. And there could be a capital return to shareholders there,” he said.

“So it’s optically expensive, but it’s a very, very high quality franchise.”

Read The Motley Fool’s full exclusive interview with Chris Tan right here.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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