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The Woolworths Group Ltd. (ASX: WOW) the stock price has had a good year so far. Shares of the retail conglomerate are up more than 15% year-to-date, compared to a 10% gain for the S & P / ASX 200 Index (ASX: XJO).
Valuing ASX stocks is never an easy task. This is especially true for a conglomerate type business like Woolworths. The Australian company has interests split between its Supermarkets, New Zealand Food and Wallet segments.
Shares of the retail group are trading at $ 39.21 per share at the time of writing. So how can investors determine how this compares to its “real” valuation?
How do you rate the Woolworths share price?
Assessment can often be more of an art than a science. There are a few generally accepted ways of valuing stocks, and they all have their pros and cons.
The first, and perhaps the most common, is a fundamental valuation using a discounted cash flow (DCF) method. This involves forecasting future earnings based on a variety of key assumptions and determining the present value of those cash flows.
The idea is that investors should be prepared to pay roughly what they expect to receive in risk-adjusted future cash flows. Of course, if the Woolworths share price traded below this value, that would be considered a good deal.
The big bang on DCF models is the power of key assumptions. Simply changing the assumed annual growth rate of earnings, or the discount rate used, can have a significant impact on the valuation.
Investors wishing to value the Woolworths share price could also apply relative valuation techniques. This includes assessing how Woolworths’ dividend yield and price / earnings (P / E) ratio compares to its peers.
The obvious comparison here is against Coles Group Ltd. (ASX: COL) as a pure-play supermarket. Woolworths shares are currently trading at a dividend yield of 2.75% and a P / E ratio of 32.1.
Coles shares are trading at a dividend yield of 3.58% and a P / E ratio of 22.7 at the time of writing. At a basic level, this would imply that Coles shareholders are getting more for their money than Woolworths shareholders.
Of course, there are many differences between companies that can make comparisons difficult. These include exposure to other areas (such as Woolworths’ other retail exposures) and capital gains versus dividends.
Finally, investors wishing to value the Woolworths share price could use a comparable transaction approach. This would involve finding similar and recent retail buyout transactions and applying the paid transaction multiples (such as EBITDA to enterprise value multiple) to the Woolworths numbers.
This approach can be difficult to find comparable and current data that provides meaningful assessments.
Evaluating the Woolworths share price is a difficult business. What a fair price will look like for the retail group will depend on future growth assumptions that may be affected by the group’s current initiatives.
Investors often use several valuation approaches to calculate a range of values and find a median or average price to compare with the current price of the stock.
The Woolworths share price is outperforming the ASX 200 this year, but it is up to value investors to see if there is more value left in the retail conglomerate ASX.