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Kick Off: Woolworths Limited v Wesfarmers Ltd

There’s a veritable clash of the titans in the retail poolWoolworths Limited (ASX: WOW) will take on Wesfarmers Ltd (ASX: WES) in a first round match of the ASX world cup

Over the last five years the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has returned about 32%. In comparison, Woolworths boasts a return of 37.5% (not including dividends) so it’s undoubtedly a winner. However, Wesfarmers is the favourite as it has returned 83% in five years, before accounting for dividends.

Pre-match commentary and stats

Woolworths owns the eponymous supermarkets, as well as a network of pubs, liquor stores, poker machines and petrol stations. It has recently ventured into hardware but has yet to achieve great success with that strategy.

Wesfarmers is more of a mix. Asides from owning Coles supermarkets, it has interests in coal mining, hardware, pokies, liquor and petrol stations. It recently sold its major insurance brands to Insurance Australia Group Limited (ASX: IAG).

Woolworths Wesfarmers
Market Capitalisation $45.82 billion $47.79 billion
Forecast FY 14 P/E ratio 18.62 19.97
Forecast FY 14 Yield 4.0% fully franked 4.64% fully franked
FY 2013 Cashflow Yield 6% 8.26%
Net interest cover 9.63 11.61

 Notes: Thompson Consensus Forecasts, and based on last FY reports.

GAME ON

When it comes to price, it’s simply too close to call. Wesfarmers boasts a higher cashflow yield and forecast dividend, but also carries the weight of a forward P/E ratio of almost 20. That’s quite high for a company operating in fairly saturated domestic markets. Woolworths has a lower P/E ratio which compensates for a slightly lower dividend yield. Neither team can find the back of the net on price.

Debt is a different matter, with Wesfarmers demonstrating significantly better interest cover, and lower gearing than Woolworths.

Former Coles CEO Ian MacLeod plays the ball to new Coles CEO (former COO), John Durkan. Durkan heads it into the net!

Wesfarmers scores! 1 – 0 to Wesfarmers.

Woolworths looks good after kick off, thanks to superior growth prospects and more focus on consumer-facing businesses. Better yet for Woolies, Wesfarmers is tied to the capital-intensive commodity business that is coal mining.

The company’s focus pays off and Woolworths scores with a massive strike from just outside the box.

The score is locked at 1 – 1 going into the break.

Woolworths’ gambling interests leads it to give away a penalty early in the second half. After all, the company is the biggest owner of poker machines in Australia.

However, Wesfarmers are coal miners and have helped squeeze Australian milk suppliers to breaking point – somehow, they miss from the penalty spot.

Woolworths is looking dangerous in injury time when it looks like a Wesfarmers defender fouls just outside the box. Woolies’ decisions to phase out battery cage eggs by 2018, and to re-sign with Australian cannery SPC Armoda convince the referee to award the free kick. Wesfarmers’ fans call it acting.

Woolworths scores from the free kick, and the final whistle blows shortly thereafter.

2 – 1 to Woolworths in a close match, as the police rush in to quell the rioting amongst Wesfarmers’ fans.

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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of  the companies mentioned in this article.

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