Is the Wesfarmers share price a bargain?

Photo credit: AS 1979

Shares in Wesfarmers Ltd (ASX: WES) continued to be sold-off yesterday adding to the significant falls experienced on Wednesday. In the past two trading sessions the stock has now lost a combined total of 7.6% with the stock closing Thursday at $40.38.

While the market was probably hoping for a more upbeat outlook statement when management delivered the interim results on Wednesday there were definitely a number of positives for investors to take away.

As I noted here, one of those highlights was the solid performance from the Coles business which appears to be continuing to gain ground on Woolworths Limited (ASX: WOW).

However, another very important highlight was the superb performance of hardware chain Bunnings. Here’s why…

  • Revenues increased 10.9% to $5.5 billion
  • Earnings before interest, tax, depreciation and amortisation grew 13.1% to $776 million
  • Earnings before interest and tax (EBIT) gained 13.4% to $701 million
  • Trading EBIT increased 10.6% to $668 million
  • Return on capital expanded from 31.6% to 35.8%
  • Total store sales growth was 11%
  • Store-on-store sales growth was 7.9%

In explaining the drivers of the solid operating performance of Bunnings, management had the following comments…

  • The strong result reflecting broad strength of offer and solid execution of strategic agenda
  • Sales uplifts were achieved in consumer and commercial areas
  • The significant growth in earnings and increase in return on capital achieved through productivity
  • An agreement has been reached to acquire UK home improvement and garden retailer Homebase

To put the importance of the Bunnings business to Wesfarmers into context, the Coles division – which includes not just the supermarkets but also the liquor retailing businesses – produced EBIT of $945 million.

That obviously makes Coles the biggest contributor to the group’s result, however Bunnings’ $668 million contribution is no small fry!

What’s more, Bunnings’ growth rate reinforces the power of the brand and its ability to fend off a powerful competitor in the form of Woolworths’ Masters Home Improvement offering.

It also makes the pending acquisition of Homebase and expansion into the UK exciting as it looks possible that within a few years Bunnings could in fact overtake Coles and become the largest contributor to group earnings.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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