Are Wesfarmers Ltd shares a better bet than Woolworths Limited?

Photo credit: AS 1979

Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW) are two of the most widely-held blue chip shares by Australian investors.

Wesfarmers has a market capitalisation (cap) of $43 billion, while Woolworths has a market cap of $30 billion which makes them the eighth and ninth largest stocks on the ASX respectively.

In the past there have been a number of attractions for investors in Wesfarmers with its conglomerate structure meaning a shareholder was able to gain exposure to a range of businesses and industries including coal mining, insurance, and retailing.

Today however, with the retail businesses of Wesfarmers accounting for over 90% of earnings the stock is seen by many as a direct peer comparison to Woolworths.

This means the performance of their respective supermarket operations, discount department stores and hardware chains are analysed for their comparative performances.

Here’s how the two matchup:

  • Woolworths supermarket brand versus the Wesfarmers owned Coles supermarket brand
  • Woolworths’ owned discount department store brand Big W versus the Wesfarmers owned Target and Kmart brands
  • The Woolworths joint venture operation of Masters Home Improvement business, versus the market leading and entrenched Bunnings chain which is owned by Wesfarmers

Recently, a report in The Australian newspaper highlighted the insights into the operations of Coles and Woolworths supermarkets.

Research by Macquarie Bank showed that it’s cheaper to shop at Coles than Woolworths when it comes to fruit, vegetables, meat and dairy.

This result bodes well for shares in Wesfarmers as it suggests the Coles business has an edge over Woolworths in delivering cheaper prices to customers.

Looking out over the next two financial year (FY) periods and earnings per share (EPS) are expected to grow for Wesfarmers, while analyst consensus shows a forecast decline in EPS for Woolworths. Based on FY 2017 forecasts Wesfarmers is trading on a lower price-to-earnings (PE) multiple of 15.8x compared with Woolworths’ forecast PE multiple of 16.7x.

On balance, there seems to be a stronger case for owning shares in Wesfarmers, when compared to Woolworths.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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