Woolworths shares are ‘fully valued’ and investors should buy Coles instead: broker

Woolworths Group Ltd (ASX: WOW) shares are having a subdued start to the week.

In afternoon trade, the retail giant’s shares are trading largely flat at $32.56.

This compares unfavourably to the ASX 200 index, which is up over 0.4% at the time of writing.

What’s going on with Woolworths’ shares?

Investors have been holding off buying Woolworths shares after brokers responded somewhat negatively to the company’s first quarter update.

In case you missed it, last week Woolworths released a sales update for the three months ended 2 October. That update revealed that the company delivered a 1.8% increase in group sales to $16,363 million.

However, rather than its supermarkets business driving the growth, it was (unexpectedly) the Big W and Australian B2B businesses doing the heavy lifting. In fact, the key Australian Food business reported a 1.1% comparable store sales decline for the period.

This was particularly surprising given that its rival Coles Group Ltd (ASX: COL) reported a 2.1% increase in comparable store sales for the same period.

What are brokers saying?

The team at Morgans wasn’t overly impressed. In response, the broker has retained its hold rating and cut its price target on Woolworths shares by 8.5% to $34.10. This implies modest upside from current levels. Morgans commented:

Woolworths’ 1Q23 sales trading update overall was weaker than we expected. LFL sales: Australian Food -1.1% (vs MorgansF +0.2%), NZ Food -3.3% (vs MorgansF -0.5%) and BIG W +29.9% (vs MorgansF +25.0%).

However, the broker acknowledges that management has revealed that sales trends have improved in October.

Management said year on year sales growth trends in Australian Food have improved in October as the business cycles out of the NSW and VIC lockdowns of last year, with the 3-year sales growth rate broadly in line with 1Q23.

Nevertheless, its analysts just don’t see enough value in Woolworths shares to be able to recommend them as a buy and prefer rival Coles. They conclude:

Our target price decreases to $34.10 and we maintain our Hold rating. Trading on 23.5x FY23F PE and 3.1% yield we continue to see the stock as fully valued and continue to prefer Coles in the Staples sector.

Morgans has an add rating and $19.50 price target on Coles’ shares.

The post Woolworths shares are ‘fully valued’ and investors should buy Coles instead: broker appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET. 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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