Will Wesfarmers Ltd sell its coal business?

Wesfarmers Ltd (ASX: WES) has seen its share price hit a one-year high of $45.69 this month – not far off the all-time high of $46.95 set in early 2015.

So far this year, shares in the industrial conglomerate are up more than 8% compared to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) gain of just 2.7%.

Much of the recent gains in Wesfarmers’ share price are down to a soaring coal price, rival Woolworths Limited’s (ASX: WOW) ongoing issues, a 6% increase in revenues for the 2016 financial year (FY16) and positive outlooks for a number of Wesfarmers’ businesses.

Bunnings and Coles are humming along nicely, as is Officeworks. Kmart has recovered nicely and the only problem child appears to discount variety store Target.

The surging coal price means that Wesfarmers’ Curragh and Bengalla mines are expected to contribute positively to earnings over the next few years, rather than acting like a boat anchor. In FY16, the coal division reported a loss of $310 million in earnings before interest and tax (EBIT) as revenues dropped 27%.

The company was also forced to take a $850 million non-cash impairment on its Curragh coal mine. But analysts have reportedly pencilled in earnings of as much as $296 million in FY17 and potentially $420 million in FY18, thanks to the turnaround in coal prices.

That turnaround may allow Wesfarmers to sell its coal mines for a decent price to focus on its retail businesses.

At least that’s what analysts think.

But the company may need to be quick about it, with concerns the strong gains in coal prices are unsustainable. Wesfarmers launched a strategic review of the Curragh division earlier this year. CEO Richard Goyder also said that the company would look at any options except to close the mine.

Foolish takeaway

Given Bunnings’ recent expansion into the UK through the acquisition of Homebase, now may be the perfect time to sell off what many consider to be a non-core asset.

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Motley Fool writer/analyst Mike King owns shares in Wesfarmers and Woolworths. You can follow Mike on Twitter @TMFKinga

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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