Might the Woolworths Group Ltd (ASX: WOW) share price be a buy right now?
Over the past month Woolworths shares are down 6% but the last six months show an increase of 17%.
Whilst I can’t be certain, I’d put the strength over the last few months down to the fact that lockdowns in Melbourne and Sydney are leading to stronger sales and profit for its supermarkets.
With cafes and restaurants largely shut, it means households are more likely to be getting their food from the supermarket during this period.
Why is it a good ASX share to consider?
Woolworths has some strong competitive advantages.
It has the largest supermarket and logistics network in Australia.
It would take a very large competitor to make a dent in Woolworths’ demand, like Aldi did. Coles Group Ltd (ASX: COL) is the only other large competitor.
Being the largest comes with a range of very useful economies of scale such as stronger purchasing power.
In terms of profit reliability, we all have to eat. Whether the meal is steak or 2-minute noodles, Woolworths can supply the customer. Food demand isn’t likely to go down unless the population decreases. Demand is consistently good over time.
Woolworths can slowly increase margins from bigger scale, better logistics efficiencies and more automation.
There are also other food areas that Woolworths can grow in such as with PFD Food Services.
A reliable dividend is another area that Woolworths can delight its shareholders with. It currently has a fully franked dividend yield of 2.75%.
Why the Woolworths share price doesn’t appeal to me
Woolworths is a fine business. I’d rather own shares of it for the long-term than own cash.
However, the growth rate of Woolworths sales, from here, is likely to be low. Sales could go backwards in the short-term once lockdowns are over.
Population growth isn’t likely to be as fast as it used to be.
Slow sales makes the Woolwortgs valuation seem expensive. A business like Wesfarmers Ltd (ASX: WES) has a long-term track record of growing profit at a decent rate compared to its price/earnings (p/e) ratio. However, I fear that the Woolworths profit growth rate will be low and therefore there are plenty of other ASX growth shares that may be better options for the medium-term and the long-term.
At the current Woolworths share price, it is valued at 30 times the estimated profit for the 2022 financial year according to the CommSec forecast. That seems too expensive to me for it to be compelling value over the next three years.