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Is Wesfarmers Ltd a buy?

What: The Australian Financial Review is reporting that broker Goldman Sachs has reiterated its ‘buy’ recommendation on blue-chip conglomerate Wesfarmers Ltd (ASX: WES).

So what: The call comes in the wake of Wesfarmers receiving final regulatory approvals and settlement of the $1.845 billion sale to Insurance Australia Group Limited (ASX: IAG) of its insurance underwriting operations. According to analysis by Goldman Sachs this could potentially lead to a $1.30 per share capital return to shareholders although the broker believes a pay-down of debt may be a more likely outcome.

Now what: Many investors have been attracted to Woolworths Limited (ASX: WOW) in preference to Coles, owned by Wesfarmers, due to the market leading margins and positioning of Woolworths. This has resulted in Woolworths share price outperforming Wesfarmers over the past twelve months, although both stocks have underperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

For contrarian investors however, the stronger growth potential lies with Coles and this is an important factor underlying the investment case for Wesfarmers. With the share price of Wesfarmers currently around $41.70 and the Goldman Sachs target price at $52.27, this suggests upside of around 25% and supports a compelling ‘buy’ case.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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