Is it a purchase in 2022? Why This Top Broker Is Giving 15% Upside On Woolworths Shares (ASX:WOW)

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the Woolworths Group Ltd. (ASX: WOW) The stock price closed higher today at $34.36, up 1.33% from yesterday’s close.

Shares of the retail conglomerate stabilized in 2022 after the company’s share price fell late last year. Investors saw their holdings fall from 52-week highs of around $52 to now trade near 52-week lows.

But not everyone is bullish on Woolworths, with a broker maintaining its overweight position in the retail giant. We’ll take a look.

Is Woolworths a buy in 2022?

According to JP Morgan analysts, Woolworths is attractively priced and offers long-term upside potential. The broker says that makes it a buy right now.

After some readjustments, analysts now value Woolworths at $39.60 per share, suggesting more than 15% upside potential.

The broker believes that Food LFL [like-for-like] sales growth is supported by “local, online and ongoing execution capabilities, as Woolworths continues to execute on its convenience, freshness and range strategy.”

JP Morgan analysts also like Woolworths’ operating leverage and the fact that lower COVID-19 costs, not lower labor costs, are supporting higher operating margins.

But the broker also likes each of the other segments of Woolworths’ portfolio, especially given the changing landscape of the sector.

“[The] Big W’s turnaround has been positive with new opportunities thanks to DC [distribution centre] and store network optimization,” the broker said in a recent note.

However, analysts say visible challenges remain, particularly due to continued cost pressures from supply chain disruption, COVID-19 costs in early 2022 and rising wages from of exercise 23.

Nevertheless, there are many bullish signals that offset these headwinds from the broker’s perspective.

“The Everyday Needs ecosystem leverages and extends the competitive advantages of the food business, while contributing to WOW’s earnings growth,” the analysts said.

The team also welcomes “Woolworths’ market-leading online platform” and see[s] sustained levels of strong online penetration post-COVID.”

With that in mind, JP Morgan analysts forecast FY22 revenue of $60.5 billion, resulting in free cash flow translation of $3.1 billion, both down from the exercise 21.

The broker also sees return on equity (ROE), along with other profitability metrics, decline significantly over the next few periods. However, analysts say this should bring Woolworths’ numbers back in line with long-term averages after the company’s period of hyper-growth.

“After a period of normalization, we expect online penetration to continue to grow to around 14% over the next five years,” the broker said.

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Woolworths share price overview

Over the past 12 months, Woolworths’ share price has fallen more than 6% and more than 10% since the start of 2022 trading on January 4.

The company has a market capitalization of approximately $41.4 billion at its current share price.

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