MARKETS SPECTATOR: Woolworths waning

Woolworths' modest third-quarter sales reinforce Citigroup's view the stock is too expensive.

Woolworths shares may be coming under pressure. The stock is just too expensive on price earnings analysis.

Citigroup, which has a sell rating on the shares, says Woolworths’ earnings per share “growth potential does not justify a PE ratio of 17 times” forecast 2014 earnings.

Still, Woolworths’ shares were up 2 cents to $34.17 at 1027 AEDT after it reported year-on-year that its third-quarter sales rose 2.5 per cent to A$14.42 billion. Woolworths’ supermarket unit, which comprises 89 per cent of sales, recorded 5 per cent sales growth to $12.81 billion.  

Woolworths is still expanding. It opened four new Australian supermarkets in the January to March period to bring its total of such stores to 888. The company now has 174 Dan Murphy’s stores, 165 New Zealand supermarkets, 610 petrol canopies and plans to open two new Big W stores this year. The company also owns 325 hotels.

But the market may prefer its competitor Coles, owned by Wesfarmers whose shares are actually trading at a higher PE than Woolworths at 19 times forecast 2014 earnings, according to Citigroup. Citi perceives stronger earnings growth and life still left in the turnaround story at Coles. 

Citigroup expects Woolworths’ shares to decline to $31.