Wesfarmers Ltd vs Woolworths Limited: Which is the better share to buy today?

Photo credit: AS 1979

When it comes to two of Australia’s largest retailers, Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW), investors have really been left in little doubt as to which company the market currently prefers.

In the past 12 months, the share price of Woolworths has slumped 21%, while the share price of Wesfarmers has slipped just 4%, which is roughly on par with the 2.4% decline from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

Despite both Coles (owned by Wesfarmers) and Woolworths’ supermarket businesses being exposed to the competitive threats of Aldi, it’s Woolworths’ profit margin which has received all of the market’s attention.

Likewise, despite Wesfarmers owning very large coal mining assets which are currently suffering from record low coal prices, it’s been Woolworths’ failed attempt to enter the hardware sector which has garnered all of the headlines.

These factors (amongst many others) are important when it comes to assessing the outlook and determining a valuation for these two companies. The other important factor is the price investors are asked to pay for shares in each business.

Based on analysts’ consensus estimates provided by Reuters for the financial year (FY) ending 30 June 2017, Wesfarmers is forecast to earn 234 cents per share (cps). With the share price of Wesfarmers closing Tuesday’s trading session at $40.34, this implies a forward price-to-earnings (PE) ratio of 17.2 times.

In contrast, Woolworths’ consensus forecast shows earnings per share of 135 cps in FY 2017. With a share price of $21.62, this implies a forward PE of 16 times.

In this instance, based on consensus figures, it’s hard to conclude that Woolworths’ shares are the more attractive relative buy given the narrowness of the discount to its peer Wesfarmers.

Rather, taking into account qualitative factors, I would lean towards Wesfarmers as the more attractive buying opportunity today.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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