MENU

Wesfarmers Ltd shares hit new 52-week high: Is it too late to buy?

Last week, the share price of Wesfarmers Ltd (ASX: WES) touched a fresh 52-week high of $45.38.

Shareholders have now experienced a 12.4% rise for the year which is certainly not a bad absolute return.

Equally, on a comparative basis a 12.4% rise is impressive considering the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has gained just 3.5%.

Some investors may have been taken by surprise that Wesfarmers has rallied to a new high in light of the weak performance of some other top 20 stocks. Fellow blue chip Woolworths Limited (ASX: WOW) for example remains well off its 52-week high.

Having produced solid near term outperformance, should investors expect further near term gains ahead for Wesfarmers?

What have we learnt over the past three months?

If we observe Wesfarmers’ share price over just the past three months, we’ll see that the price has risen 12.2% in that time.

These gains could be explained by investors revising their outlook and valuation for the company in light of business conditions and Wesfarmers’ recently released full year results.

Positive business conditions for Bunnings: Bunnings is a key profit generator for Wesfarmers and the recent demise of competitor Masters has not only removed a major competitor from the market, but has also allowed the group to pick up a handful of appealingly located store sites.

According to a media release in late August, if all agreements complete, Bunnings will ultimately obtain 15 previously controlled Masters sites. Eleven of these 15 locations will represent replacement stores with the remaining four sites representing new store locations.

Positive profit outlook: Recently, shareholders received a reduced final dividend of 95 cents per share (cps), down 14.4% from 111 cps. However, revenues grew 5.7% to nearly $66 billion and earnings per share (EPS) only slipped 3.1% to $2.09 per share. Return on equity was almost flat at 9.6%.

Although management didn’t provide any figures in its outlook statement, overall management did appear upbeat on the outlook for its retail facing businesses, while noting that the outlook remained challenging in the near term for its industrial facing businesses.

While management chose not to provide much colour on the group’s outlook, analysts have of course made their own estimates.

According to consensus forecasts provided by Reuters, EPS is set to increase over the next two full year reporting periods to reach $2.57 in FY 2018.

Foolish takeaway

Based on the consensus estimate above, the stock is trading on a forward price-to-earnings ratio of approximately 18 times.

That looks a fairly full price in my opinion and could suggest little near term upside in the share price, unless earnings estimates are increased.

The next test for Wesfarmers’ share price is likely to be October 26, when the company announces its first quarter sales result.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget about blue chips which are facing headwinds like Woolworths and BHP. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.