Wesfarmers Ltd vs. Woolworths Limited: Which is the better buy?

What: Shareholders of Wesfarmers Ltd (ASX: WES) have reason for feeling somewhat comfortable about the group’s upcoming half-year financial results which are due to be released on February 24.

With the share price up 2.5% so far this calendar year and up 23% over the past five years, Wesfarmers can boast of solid outperformance again the negative 9% and negative 1% returns from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the same respective time frames.

In comparison, Woolworths Limited (ASX: WOW) shareholders may have a degree of trepidation regarding the interim earnings announcement which is scheduled for February 26.

Woolworths shares have lost 8% since the beginning of January and are down over 14% in the past five years, which highlights the negative view many investors have taken towards the company and its outlook.

So What: With both of these major blue chip companies due to report next week, in the near term investors can expect that the driver of the share price for each stock will be their interim results and their outlooks for the full year.

On this score, Wesfarmers is certainly sitting pretty with consensus estimates suggesting flat earnings per share (EPS) in financial year (FY) 2016 and mid-single digit earnings growth in FY 2017.

In contrast, Woolworths is in the hot seat with consensus estimates forecasting a drop of 27% in EPS this financial year and a further 1% drop next financial year. (source: Thomson Consensus Estimates)

Now What: While earnings momentum is likely to drive the stock prices of Wesfarmers and Woolworths in the near term, thankfully, in the longer term a conservative assessment of intrinsic value should drive the stock price.

In this regard, there remains hope for Woolworths shareholders. With the stock trading on a FY 2017 forecast price-to-earnings ratio of 16 times compared with Wesfarmers at nearly 19x, investors may one day be attracted to the relative value on offer from Woolworths shares.

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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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