Woolworths back as market darling as analysts board the bandwagon

Maybe it’s a sign of the herd mentality which dominates the market but Woolworths is back as a market darling.

Woolworths CEO Brad Banducci in Town Hall Woolworths in Sydney. (Adam Yip/ The Australian)

The bandwagon behind Brad Banducci and Woolworths is building fast as retail analysts jump on board forecasting better earnings for the supermarket sector as a whole this year.

Some would argue the latter day converts have left their run too late but in the competitive market there is a certain safety in numbers which makes it easier to be on the buy side when everyone else is.

Some would use the recent rush behind Banducci as a classic example of the herd mentality which runs the sharemarket but Banducci and his chair Gordon Cairns are unlikely to let that worry them and are simply happy to be a market darling again.

Whether they remain as such of course depends on execution, which explains the caution at news the company had hired former Tesco executive Claire Peters as the new supermarkets boss.

The long-time bulls like BAML’s David Errington and Perpetual’s Paul Skamvougerous expressed some concern that Banducci was taking his eyes off the main game of running supermarkets.

There is also a school of thought which says the company should divest Big W and just concentrate on the food and liquor operations.

Cairns wants to see some sort of turnaround at Big W in order to increase the value from any sale.

UBS’s Ben Gilbert was the last to join the bandwagon with a note out on Tuesday increasing his rating on Woolworths from a sell to a buy and lifting his price target on the stock from $19.10 a share to $27.30.

Last week it was Shaun Cousins at JP Morgan who increased his price target from $22 to $28 a share.

Given the recent 12 per cent run in the stock from $22.40 a share in mid-December to a high last month of $25.16, neither call could be regarded as counter cyclical.

Since June last year, when the stock was trading at $20.89, it has increased 24.5 per cent against the market’s 7.2 per cent gain.

The stock is up 37 cents at $24.97 today.

The counter-cyclical prize for picking value goes to BAML’s David Errington and the folk at Perpetual who bet $1.2 billion on the stock back in September 2015 when Gordon Cairns became chair.

Errington thinks the stock has plenty left to run, with a $40 price target.

There are still some holdouts including CSFB’s Grant Saligari who has the stock on a neutral and Morgan Stanley’s Tom Kierath who has an underweight recommendation on Woolworths and a $20 price target.

In a recent note he said: “At the current valuation we argue Woolworths is already priced for a turnaround.”

UBS’s Gilbert said his optimism was based on evidence of a more rational market, rising commodity prices and due to the expected abatement in deflation.

He noted “the key risk is an irrational response from Coles as it competes with a stronger, better capitalised competitor in Woolworths”.

The counter-cyclical call from Errington was based on his belief the company has quality assets but lousy management.

The entry of Cairns as chair, the departure of Grant O’Brien and his ultimate replacement by Banducci and the closure of the Masters debacle were the key positives from his perspective and the reasons why he thinks the stock has plenty to left to run.

One reason for the present enthusiasm is the expectation that for the first time in seven years Woolworths will outperform Coles on comparable store sales.

The fact Coles is comparing its performance against 4.5 per cent growth a year ago and Woolworths three consecutive negative quarters plus that fact that it’s a result of $1bn in capital expenditure is being ignored by the new found bulls.

Brad Banducci will speak at The Australian’s 5th annual Global Food Forum on Tuesday, March 28 in Melbourne. Tickets available here