Wesfarmers Ltd shares could surge on the rocketing coal price

Over the past 12 months, the share price of Wesfarmers Ltd (ASX: WES) has gained around 6.5%.

That might not sound like a lot but when put it into perspective against certain benchmarks it is surprisingly good.

Consider for example the 2.5% return over the past 12 months of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), which is a good proxy for the average return from investing in the stock market.

Alternatively, Wesfarmers’ nearest peer is Woolworths Limited (ASX: WOW). Woolworths’ share price is down about 10.5% over the last year.

Meanwhile, fellow blue chip company Telstra Corporation Ltd (ASX: TLS) has seen its share price slide about 12%.

While Wesfarmers’ share price performance is commendable on a relative basis, of greater importance is the group’s underlying business performance. On this score, Wesfarmers’ performance is arguably equally commendable considering the massive headwind faced by the company’s resources division.

Consider this…

Just four years ago when Wesfarmers reported its 2012 financial year (FY) results, the resource division – which owns the Curragh coal mine in Queensland and 40% of the Bengalla coal mine in NSW – reported revenues of $2.1 billion and achieved earnings before interest and tax (EBIT) of $439 million. Coal production for the year was 14 million tonnes.

Fast forward to FY 2016 and the same division produced revenue of just $1 billion and made an EBIT loss of $310 million. Making the comparison relatively easy, coal production for the 12 months was once again 14 million tonnes.

There has obviously been a significant decline in earnings contribution from the resource division in the space of a few short years. Despite this coal price headwind, the group wide results highlight the resilience of Wesfarmers’ conglomerate structure.

Here are Wesfarmers’ consolidated group results (which back in 2012 included contributions from the now divested insurance and gas businesses):

  • FY 2012: Group revenue $57.7 billion and EBIT of $3.55 billion; margin 6.15%
  • FY 2016: Group revenue of $66 billion and EBIT of $3.6 billion; margin 4.45%

Foolish takeaway

If the motivation for buying a blue chip is to own a strong, defensively positioned company that can cope with all manner of economic conditions, then the past performance of Wesfarmers suggests to me that the group is definitely a company built to last.

Its ability to grow the Coles division during a period when Woolworths has stumbled and to maintain group profits despite the sale of certain profitable business units during a decline in its resource division speaks to the defensive nature of Wesfarmers’ conglomerate structure.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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