Is Woolworths ‘the granddaddy of recession-proof stocks’?

Woolworths Group Ltd (ASX: WOW) shares saw plenty of volatility during the COVID-19 period. But now the economy is facing uncertain times amid inflation and higher interest rates. Could Woolworths be one of the most recession-proof stocks around?

As a supermarket business, it’s understandable why investors may be looking at Woolworths shares as a defensive option because it sells food – one of the most essential products that a household needs.

We all need to eat, so even if there is a decline in economic demand for other ASX shares, I don’t think it’s likely that Woolworths will suffer the same fate.

Is Woolworths the most recession-proof ASX stock?

During the worrying times of March 2020, there was huge demand for Woolworths products. In fact, Christmas-time levels of demand.

The last year has shown that even though food prices have been going up, households have kept buying – what choice did they have?

If a recession were to occur, I think people are going to choose to buy food from Woolworths over buying a new TV, going on a holiday, buying new clothes, or other non-essential spending.

Certainly, I’d suggest that Woolworths’ earnings are less likely to fall in a recession than those of JB Hi-Fi Limited (ASX: JBH), Super Retail Group Ltd (ASX: SUL), or Nick Scali Limited (ASX: NCK).

Let’s not forget that Woolworths also owns the majority of the PETstock business – I’d guess that households will continue to spend on their furry (or non-furry) friends.

However, I’m not sure that Big W’s earnings are that defensive, even though it’s only a relatively small part of Woolworths’ overall earnings.

We could say that Coles Group Ltd (ASX: COL) has a very similar set-up to Woolworths because of its large chain of supermarkets. But, Coles has a liquor division rather than PETstock and Big W.

I think Woolworths is right up there as one of the most recession-proof ASX stocks when it comes to its earnings.

There are a few other categories and ASX shares that I might expect to continue performing, such as funeral provider Propel Funeral Partners Ltd (ASX: PFP) because of the inevitable annual demand for its services. Telco Telstra Group Ltd (ASX: TLS) and energy infrastructure business APA Group (ASX: APA) could also see strong resilience.

Recent performance

The latest we’ve heard from Woolworths has been very promising. Woolworths reported that in the first six months of FY23, sales rose 4% to $33.2 billion and underlying earnings per share (EPS) grew 11.7% to 71.9 cents.

Its financials have done well and the Woolworths share price has jumped 18% in 2023 to date. But, valuation can be a risk if the share price goes too high.

According to Commsec, Woolworths shares are valued at 28x FY23’s estimated earnings. I think the business is a good candidate for a recession-proof stock, but it doesn’t look cheap at this price considering how high interest rates are these days.

The post Is Woolworths ‘the granddaddy of recession-proof stocks’? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Super Retail Group. The Motley Fool Australia has positions in and has recommended APA Group, Coles Group, Super Retail Group, and Telstra Group. The Motley Fool Australia has recommended JB Hi-Fi and Propel Funeral Partners. 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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