Stock Focus: Woolworths (WHL)

It’s difficult not to love Woolworths (WHL) as both a company and as a stock. As a company that caters to our basic human needs. It feeds us, it clothes us and if you’d invested in its stock, it would have also made you rich…

Over the last five years this food and clothing retailer has delivered a spectacular 312.44% point to point return. If you look at total return: That is  Woolworths capital gain with dividends reinvested as well as the additional gain investors made by following their recent rights offer, you’d be looking more at 467% return over the period. No investor can turn their nose up at that sort of money making machine.

And hats off to CEO Ian Moir and his team. They’ve lead this company through a tough economic environment. And, while there’s no doubt the higher LSM groups have been more resilient, you can’t argue with strategic moves like the acquisition of David Jones which effectively propelled the group from national to hemispheric dominance.

When buying Woolies you’re buying a story of two parts. Firstly, you’re buying a stable food business with non-cyclical earnings. Inflation increases get passed through effectively to the consumer and hey, we all have to eat in a downturn. The food business continues to outperform with strong  with recent turnover growth up +14.1% and operating profit growth of +24.3%.

On the other side you’re also buying a more cyclical fashion and clothing retailer holding house brands like Country Road, Witchery, Trenery. This side of the business has come under a bit of pressure in the latest set of results and is no doubt a big focus for management going forward.

The big risk at the moment seems to be on how Woolies management digests their monolithic David Jones purchase. They’ve bitten off a whopping piece and they’re busy chewing, but it remains to be seen whether they can extract the so called “synergies” from the business. The execution risk is there, but according to JP Morgan management, the “synergies” could be worth as much as A$130m or R1.2 billion. And that is a tasty treat for investors to swallow.

According to JPM, an added kicker could be that if the sale and lease-back of David  Jones’ properties. This would de-leverage the group far more quickly than the market is expecting. And that could propel the share price even higher!

So should you buy?

FUNDAMENTAL VIEW: What are the sell-side analysts saying?

20150518WHLANR

Source: Bloomberg

I’m following UBS (ranked 2) and Renaissance Capital (ranked 1) and buying with a target above R100.

TECHNICAL VIEW: What is the chart saying?

20150518WHL

Source: Saxo Capital Markets

  • Stochastic: Overbought
  • RSI: About to enter overbought territory
  • MACD: Moderately overbought

Woolworths is midway up in a rising channel.  It has managed to take out the its previous closing high and has managed to break above. It’s now completed the retest of the break and, in spite of the negative oscillators, looks like it could continue moving towards the top of the channel at R105, a significant move higher. If the momentum stalls, expect a retest of the incline support where buying will come in at R89.

QUANTITATIVE VIEW: What is the house “quant” model saying?

When running our proprietary 18 factor quantitative ranking model, Woolies is places 20 out of almost 400 companies tested. The company continues to strengthen having previously placed 23.


Verdict: I’ve got to be HOT on this one!  Considering the benefits of David Jones will really only flow through in 2017 (and thus puts it on a 2 year forward multiple of around x15) the valuation doesn’t look particularly extended. In fact, to my eyes, it’s one of the cheaper retailers out on t he South African market. The timing might not be perfect,  but it’s worthy of a place in my portfolio.


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Sources: WHL Intergrated report, SENS, Google Finance, WHL Website, JP Morgan Cazenove