With the outlook for the Aussie economy being rather uncertain, many investors are rightly considering the purchase of foreign-focused companies. The logic is that they will be able to access faster growing, better performing markets which should allow them to post superior top and bottom line growth numbers than their Australia-focused peers. Furthermore, they should benefit from a continued weakening of the Aussie dollar, thereby providing their earnings with a short term uplift.
However, domestic-focused stocks should not be forgotten and, in addition, companies which are operating within the retail space should not be, either. That's because, while they may be enduring a challenging period, their valuations could indicate capital upside over the coming years.
Take, for example, Wesfarmers Ltd (ASX: WES). Its share price has fallen by 9% in the last six months as the consumer outlook (and particularly the supermarket outlook) has come under pressure.
Despite this, Wesfarmers is expected to post a growth in earnings of 6.8% per annum during the next two years, which is considerably more appealing than for a number of its retail peers. A key reason for this is the company's conglomerate structure, with it providing Wesfarmers with a considerable amount of resilience and stability so that even if one division is seeing its financial performance come under pressure, others can offset this to a degree.
Although Wesfarmers is now less diversified than it has been in recent years as a result of the sale of its insurance broking division to Arthur J Gallagher and the sale of its insurance underwriting division to IAG, it continues to have exposure to forestry, property businesses and financial services industries, as well as industrial activities such as chemicals, energy solutions and fertilisers.
This means that, while it is focused on the Aussie economy, its earnings growth may be more resilient than is currently being priced in by the market. That's especially the case since Wesfarmers trades on a price to sales (P/S) ratio of only 0.73, which is substantially lower than the ASX's P/S ratio of 1.36. And, while Wesfarmers has a price to earnings (P/E) ratio of 17.9 versus 15.6 for the ASX, its relative resilience and stability mean that a larger premium may be justified in future years.
Furthermore, Wesfarmers remains a top notch income stock, as evidenced by its fully franked yield of 5.1%. That's 50 basis points higher than the ASX's yield and, in addition, Wesfarmers has a track record of increasing dividends per share at an annualised rate of 12.2% during the last five years. With dividends expected to rise by 4% next year, it seems likely that the company will continues to offer an inflation-beating income growth outlook in the coming months and years.
So, while investing in internationally-focused stocks makes sense, there appears to be an opportunity to profit through the purchase of Wesfarmers due to its conglomerate structure, income potential and valuation.
