The Wesfarmers Ltd (ASX: WES) share price leaves a lot to be desired.
Who is Wesfarmers Ltd?
As a $51 billion Australian company, most people would have heard of the name, Wesfarmers, but may not know what exactly it does.
Wesfarmers is the owner of Coles, Bunnings Warehouse, Kmart, Target, Officeworks, and an industrials and coal mining business.
Here's the breakdown of Wesfarmers' sales:
As can be seen, the company's Coles business is the primary sales generator. However, given that most of Wesfarmers' businesses are retailers (read: volume businesses — selling many products at slim profit margins) it's worth looking at the company from the perspective of pre-tax profits rather than sales.
As can be seen, Bunnings Warehouse plays a big part when it comes to Wesfarmers' bottom line (a.k.a profit). That's because it generates better profit margins on its products.
What's good about Wesfarmers?
Wesfarmers makes up a large chunk of Australian investors' share portfolios because of its defensive qualities. If you lose your job, you'll still need to buy bread or fruit from Coles. If you need a kettle or bowls for the house, you'll still shop at Kmart.
Wesfarmers is a very well-run business, too. And when good management combines with a good business, you are more likely than not to get decent shareholder returns (dividends and capital gains) — if you pay a sensible price.
Risks
While Wesfarmers is a great business, it is not immune from its fair share of risks. Some might argue that Bunnings is a cyclical business or that its venture into the UK could create unnecessary risks for the company. In supermarkets, Woolworths Limited (ASX: WOW) and Aldi have something to prove. A price war wouldn't be good news for Coles.
Valuation
Smart investing requires us to balance the risks with the potential return. In my opinion, there is a lot to like about Wesfarmers but its shares are simply too expensive for me to justify an investment. When it comes to blue chip companies like Wesfarmers, shares rarely trade materially below their intrinsic value. Therefore, it's paramount to remain patient.
That's what I'm doing.
