There's some nice clouds overhead, so might as well shout at some of them...

Look, Woolies is a wonderful business. There's not much to dislike...except the price. As with CBA and other "blue chips", it's just beyond anything sensible. It's a global phenomenon, and probably something to do with ETF flows, or just TINA (there is no alternative), or maybe just the expected outcome of all this monetary inflation.. i dunno

But let's take a look at things: the business' revenue is essentially flat in real teams. And all these inflationary pressures (wages in particular) have taken a knife to earnings -- you have to wonder how much of that can be recovered through efficiency gains. I suspect, despite the political pressure, they'll simply have to increase prices at some point. They always take a beating from the media on that front, but (at least in this latest half) they certainly haven't been "gouging" customers. Quite the opposite.

They told the market that things are expected to stay tough for the foreseeable future, and they still trade at 22x forward earnings. I think they did well to only see a 3% drop in the share price today.

With franking, the divs are ok, but the total shareholder return will struggle to be beyond 6-7%pa in the next few years -- unless somehow the market multiple expands even more.

Anyway, seems excessive. But maybe low return but low risk isn't a terrible proposition for many.

Also, the results really do point to the struggles many Australians are having with so-called 'cost of living' pressures. Smaller baskets, more cross-shopping at other supermarkets, more focus on store branded goods, less discretionary items -- tells you all you need to know about the state of household budgets.

Anyway, I'd be an enthusiastic buyer at $20. But not interested at $30

Shares in both Woolies and Coles have taken a hit after the ACCC alleged they misled customers about their pricing.

For Woolies, the market cap dropped by $1.5 billion due to a 3.5% fall in share price, which seems disproportionate to the likely fine they could face if the ACCC is successful.

The maximum possible fine under Australian Consumer Law could be:

• $50 million per breach
• Three times the value of the 'reasonably attributable' benefit obtained
• 30% of the corporation's adjusted turnover during the breach period

However, the last option seems highly unlikely given the legal and political influence of Coles and Woolies. Cynically, one might say the ACCC and the Government are making a show of addressing the 'cost of living' crisis, with these companies as convenient targets.

For context, the largest fine of this kind in Australian history was $125 million, imposed on Volkswagen in 2019. Even if Woolies were fined $250 million, it would represent just 7% of their FY EBIT.

If I thought shares were reasonably valued, this might be a buying opportunity. But in my opinion, they're not close.

Still, it's interesting to compare the numbers with the market reaction.

Woolies really is a great business, and will be around for a long time to come -- but it's a very mature market facing increased competitive threats, and margins will likely come under added pressure. Growth is the issue, and the current price is simply not justifiable in my view.

As I write, the PE is around 23 -- for a business whose sales have been declining (on average) for several years. Moreover, margins are coming under added pressure -- not just from the likes of Aldi and Costco (which are gaining increased share) but also Amazon. In fact, in this AFR article, Amazon is supposedly selling a range of products at around half the Woolies shelf price. 

Amazon has only 1% market share in this category, but it's growing at close to 40% per annum and will continue to become a much more dominant threat. 

Longer term, I find it tough to expect more than low single digit type growth, at best. Indeed, the consensus EPS growth forecast from Morningstar is ~4% for the next few years.

Pretty much the same thing can be said about Coles (ASX:COL).

See my forecasts page

Net profit from continuing operations rose 2.1%.

Supermarket sales up 2.2%

EPS essentially flat

Shares trading on a PE of >20 (pro-rata H1 result)

Yield is 3.7% (TTM)

Solid company, but way over priced given their maturity and growth