As we move into the domestic reporting season, I remain cautious. The market has enjoyed a strong performance since the Brexit/domestic election hiccup. With valuations driven up, it has left little margin for error for the majority of Australia’s top stocks. While I do not think we will see a wide spread negative outcome, the recent run appears to have opened up a stronger downside skew should anyone disappoint.
Arguably one of the most anticipated results is that of supermarket giant Woolworths (WOW) later this month. Since becoming chief executive Brad Banducci has made necessary changes in an attempt to reposition WOW for the future. On July 25, WOW announced an update to the market on its operating model review. The key changes were (1) $959 million in restructuring charges across food and liquor, corporate, Big W and EziBuy; and (2) FY16 EBIT guidance of $2.55 billion to $2.57b.
Management also highlighted to the market they would not be looking to raise additional capital in the short term. Although I continue to believe WOW is well placed to address the key issues facing the business, the turnaround will take longer and cost more than many expect.
On valuation grounds and lack of earnings growth in an increasingly competitive grocery market- place, the current share price level does not represent an attractive entry point in my opinion.
- Christopher Hindmarsh is an adviser at JBWere Limited which is owned by NAB. This article contains general advice only. In preparing it JBWere didn't take into account the investment objectives, financial situation and needs of any particular person. Assess if the information is appropriate for your circumstances.
