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Should you buy Wesfarmers?

Giant conglomerate Wesfarmers (ASX: WES) owns and operates a diverse array of businesses, from insurance to resources, but its results are overwhelmingly concentrated in retail.

For the 2012 financial year, Coles alone accounted for roughly $34 billion of a total $58 billion in revenue, while Kmart accounted for $4 billion and Target for $3.7 billion. For investors looking closely at a Wesfarmers investment, the argument turns on a simple question…

Is retail back?

The evidence suggests that retail has indeed recovered from the GFC lows and the lingering consumer confidence issues that followed. Take a look at the chart below to see how some of Australia’s retailers have performed against the S&P/ASX 200 Index (Index ^AXJO) (ASX: XJO) in the last year.

You’ll see that, at least in terms of share price appreciation, Wesfarmers has in fact been the best performer of the lot, beating rival Woolworths (ASX: WOW) and competitors from Metcash (ASX: MTS) to The Reject Shop (ASX: TRS) if only by a slim margin.

WES, WOW, MTS, TRS, AXJO

In the first half of the 2013 financial year, Wesfarmers’ growth in its core retail operations looked strong, with Coles pre-tax profits leaping 15.1% and overall net profits rising nearly 9.3%. Wesfarmers chief executive Richard Goyder stated that he expects growth to continue in the company’s retail division, “as we further improve customer offers and operating efficiencies, and strengthen all of our channels to market”.

But what about the price? 

After the hefty run up, Wesfarmers shares are trading at a P/E ratio of 21, and an EV/EBITDA ratio of 11.1, which seems to indicate that this growth is already well baked into the price of Wesfarmers shares. Thus savvy investors may want to look elsewhere for growth at a more reasonable price.

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Please don’t do this, Woolies

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Catherine Baab-Muguira does not own shares in any of the companies mentioned in this article.

 

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