Woolworths is a South African retailer that has struggled over the last few years starting with a purchase of the Australian retailer David Jones which took place in 2014 at a large premium to its intrinsic value. Woolies has since had to write down the value of its David Jones holding by around 60%. Ouch!
The company's current CEO appears to have a viable turn around strategy with a focus to improving their online sales. The question is, how effectively can they grow their earnings going forward?
The company has taken on a fair amount of debt compared to its historical debt levels, however, most of their debt is structured over a long period of time. This gives them time to improve their free cash flow over the next 3 -5 years. Their average annual free cash flow over recent years is around 4.5% - 5%, which isn't where share holder would want it to be.
The worrisome aspect for me is the fact that their effective interest on debt is around 8.5% per annum. To me that draws a line in the sand to say that they need to grow their earnings by at least 10% per annum.
Which could be possible under a favorable economic environment and a successfully implemented turn around strategy.
For the time being i wouldn't have the conviction to take a meaningful stake in the company.
Trading signal
For the time being the signals on the weekly chart suggest that the price may need to retrace further which could complete a head and shoulder pattern which i have shown on the chart. We should have confirmation on this in the next 1.5 - 2 months.
Please like and follow for daily posts on various asset classes. Please also share your views on the trading ideas and whether or not you find them to be of any value to you as a trader.
Please note, this idea is shared for educational and discussion purposes only and should not result in speculative investment decisions in any asset class.
The company's current CEO appears to have a viable turn around strategy with a focus to improving their online sales. The question is, how effectively can they grow their earnings going forward?
The company has taken on a fair amount of debt compared to its historical debt levels, however, most of their debt is structured over a long period of time. This gives them time to improve their free cash flow over the next 3 -5 years. Their average annual free cash flow over recent years is around 4.5% - 5%, which isn't where share holder would want it to be.
The worrisome aspect for me is the fact that their effective interest on debt is around 8.5% per annum. To me that draws a line in the sand to say that they need to grow their earnings by at least 10% per annum.
Which could be possible under a favorable economic environment and a successfully implemented turn around strategy.
For the time being i wouldn't have the conviction to take a meaningful stake in the company.
Trading signal
For the time being the signals on the weekly chart suggest that the price may need to retrace further which could complete a head and shoulder pattern which i have shown on the chart. We should have confirmation on this in the next 1.5 - 2 months.
Please like and follow for daily posts on various asset classes. Please also share your views on the trading ideas and whether or not you find them to be of any value to you as a trader.
Please note, this idea is shared for educational and discussion purposes only and should not result in speculative investment decisions in any asset class.