Are Woolworths shares a better buy than Wesfarmers Ltd?

Credit: Scott Lewis

Over the past month Woolworths Limited (ASX: WOW) shares have declined by 4.6%, narrowly outperforming the 5.7% drop in Wesfarmers Ltd’s (ASX: WES) share price.

That’s quite surprising considering all the negativity surrounding Woolworths at present and perhaps suggests that all the bad news has now been priced in to the stock.

Indeed, with both companies reporting their interim profit results during this period, market reactions to these results could be telling.

Half-Year Results Recap

Woolworths reported an enormous headline loss of $1.8 billion due to write-downs on its foray into hardware via the Masters Home Improvement chain.

The underlying result was better – a profit of $1.5 billion – however this was still down around 32% on the prior corresponding period.

Meanwhile, Wesfarmers appeared to perform well considering its exposure to the resource sector and particularly coal with profit up 1.2% to $1.4 billion.

Could Woolworths outperform Wesfarmers?

Based on the outlook statements of each of these blue-chip companies Wesfarmers would appear to have more positive earnings momentum. Investors are also enthusiastic about Wesfarmers’ decision to enter the UK hardware sector.

Turning to pricing and while Woolworths shares look cheaper based on earnings forecasts for the current financial year (FY), on a two-year view that discount is eroded by expectations of further declines in earnings. (source: Thomson Consensus Estimates)

Based on FY 2017 estimates both stocks are trading on a price-to-earnings ratio of 17 times. This looks fair for large blue chip stocks, but appears to leave little near term upside in the Woolworths share price.

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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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