The Motley Fool

Here’s why you should hold onto your Wesfarmers Ltd shares

The ongoing battle between the two retail heavyweights Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) seems to have entered a new round.

Wesfarmers, the business conglomerate that owns Coles, Bunnings Warehouse, OfficeWorks, K-Mart and Target, has taken the lead in sales growth and market speculation about a strategic acquisition has also gotten investors looking its way.

Share price movement

After following the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) down in October, Wesfarmers’ 1Q 2015 retail sales and earnings report helped the stock rise from about $40 to $43.93, or almost 10% up in about three weeks.

It’s just a few percentage points away from setting a new all-time high and breaking out of a price range it’s been in since early 2013.

Solid first quarter sales

First quarter retail sales in general were up, with Bunnings Warehouse and Officeworks leading the way (11% and 8% up respectively). Coles supermarkets achieved same store sales growth of 4.3%, but excluding weaker liquor sales, growth for food sales would be a very solid 5.0%.

For rival Woolworths, it announced 1Q 2015 same store sales for food and liquor only grew 2.1%, or around half that of Wesfarmers. Both companies are feeling pricing pressure as costs rise and new market entrants like Aldi and Costco start to chip away at market share.

For now, Wesfarmers is executing better and reaping the rewards.

Acquisition speculation

One kicker on Wesfarmers’ side is its open ambition to enter into financial services. With the $1.85 billion from the sale of its insurance underwriting business to Insurance Australia Group Ltd (ASX: IAG) and other funds at the ready, it has a multi-billion dollar war chest to potentially buy its way into the home loan and personal lending market.

This won’t be cheap, but to maintain current earnings growth levels in the long term, it is necessary. The home lending and personal banking services markets are large enough to make a difference for Wesfarmers.

The market has speculated it may have its eye on wealth management service provider AMP Limited (ASX: AMP), which is beginning to recover from slow revenue growth. Quite possibly, Wesfarmers may be running the ruler over Suncorp Group Ltd (ASX: SUN) as well because it owns the fifth largest bank in Australia. From that position, the company could challenge the big four banks.

Wesfarmers has been tight-lipped about any possible interest or movement, but investors may want to look over AMP and Suncorp to see if they might be good portfolio additions as well.

For Wesfarmers shareholders, I would suggest holding onto your shares. If an acquisition were to occur, company earnings may rise, which could push Wesfarmers’ share price up.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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