With so many supposed blue chip stocks such as Woolworths Limited (ASX: WOW) and BHP Billiton Limited (ASX: BHP) failing to live up to expectations, investors are now having to think twice about what truly constitutes a blue chip stock.
While the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has scraped out a gain of 7% in the past five years, Woolworths is down 15% and BHP is down a whopping 55%. In contrast, Wesfarmers shares have managed to outperform the index with a five-year gain of 9.5%. Wesfarmers performance is all the more credible considering the large coal operations which the group is exposed to.
With the diversified conglomerate having held its annual general meeting (AGM) this week, now could be a good opportunity for investors to reassess the investment metrics of the group and consider the potential for Wesfarmers to continue to provide shareholders with acceptable, risk-adjusted returns.
Here are some key notes on the trading update which was provided at the AGM…
- The "portfolio of businesses overall, is tracking to expectations, with good momentum in our retail divisions being offset by the performance of our Industrials division, notably the difficult trading experienced in our Resources business."
- The Coles business remains the star of the group with pleasing retail sales figures for the first quarter and continuing momentum thanks to a successful turnaround in the business since it was acquired in 2007
- The Bunnings business continues to perform strongly with positive trading momentum and Officeworks is seeing benefits from its refocused marketing efforts
- The Chemicals, Energy and Fertilisers business has benefitted from the expanded capacity of the ammonium nitrate business
- The major disappointment in terms of Wesfarmers' overall trading update and outlook is the Resources business which continues to be hampered by low export coal prices. Management stated that "the outlook for the 2016 financial year, therefore, remains challenging and we expect or Resources business to be loss making at the EBIT level this year."
While the coal division will likely continue to struggle, its influence on the overall earnings of the group is diminishing, Thanks to the diversified portfolio of businesses within Wesfarmers, management has a number of levers it can pull on to generate earnings growth in the future which means that the outlook for the group, in the long run, remains positive.
