Many analysts have recently dusted off their crystal balls, stared into the stockmarket abyss, and forecast some serious concerns ahead for Australia's grocery retailers.
Aldi, the discount retailer; Costco – a bulk buy powerhouse; and the possible arrival of Lidl, have all spooked local sharemarket investors.
Metcash Limited (ASX: MTS) – the owner of IGA and Foodworks – was the first to fall by the wayside. Metcash's share price is down 62% over the past year.
Woolworths Limited (ASX: WOW) – Australia's largest grocery retailer – is down 23% over the same time frame.
However, Wesfarmers Ltd (ASX: WES) – the owner of Coles, Bunnings, Officeworks and more – is down just 6%.
Despite lower profit margins, investors appear to believe Coles, accounting for some 60% of Wesfarmers' total sales, will be able to weather the impact of increased competition from the three foreign giants much better than its two fallen peers. I disagree.
Two reasons why I'm avoiding Wesfarmers shares
- Competition. I believe the impact of increased competition from the new foreign rivals hasn't been adequately factored into Wesfarmers' current market price. Further, the slowdown in the Resources, Chemicals, Target and Industrial businesses also pose a threat to its current price.
- Wesfarmers shares currently trade at a P/E ratio of 27.5x when its key rival trades at P/E of just 14x. Wesfarmers also currently boasts an EV/EBITDA multiple of 10.6x – slightly above its sector average, and above the 7.9x of Woolworths. Combined with my discounted cash flow analysis, I believe fair value for Wesfarmers lies at approximately $31 per share.
Is Wesfarmers Ltd a buy, hold or sell?
In my opinion, Wesfarmers shares are not a buy. However, that doesn't necessarily make them a sell either. Indeed, at today's price of around $41 per share, I'd say it's closest to a hold.
