The Wesfarmers Ltd (ASX: WES) share price was sold down following its financial report earlier this week.
WES share price
As can be seen in the chart above, the Wesfarmers share price has been heavily discounted by the market in very recent times. But despite a few gyrations, the company’s shares remain around 3% higher than this time a year ago.
What’s going on?
While staring at a chart is a tedious and unrewarding investing pastime, in my opinion, it can give us an indication of what the average investor is thinking.
Earlier this week, Wesfarmers reported its third quarter results revealing that Coles’ comparable store sales rose 0.7%, with total sales up 0.5%. Unfortunately, Coles makes up the lion’s share of Wesfarmers’ sales and profit, so the result may have underwhelmed the market.
Kmart’s sales increased a healthy 2.5% while Target’s woes continued with an 18% fall in its sales versus the same period last year.
The one shining light in the report was Bunnings Warehouse, which is currently expanding into the UK and Ireland. To do so, it is completing makeovers of its recently acquired Homebase stores, turning them into Bunnings Warehouses. Bunnings local businesses reported a 7.7% increase in quarterly sales.
Does the Wesfarmers valuation stack up?
Bunnings is an important contributor to Wesfarmers’ profit, so it is promising to see its sales tick upwards.
However, in investing, it is always a trade-off between price and value. And while Wesfarmers is undoubtedly one of the best companies in Australia, its valuation just does not stack up, in my opinion. This might explain why the market discounted its shares following the results.
By my calculations, Wesfarmers shares are currently trading at a free cash flow yield of 5% and a price earnings ratio (P/E) of 17 times. For a company growing sales at 4%, many investors may see that as an expensive valuation.
Buy, hold or sell
If you twisted my arm and gave me the choice of only BHP Billiton Limited (ASX: BHP) shares, Woolworths Limited (ASX: WOW) shares and Wesfarmers shares to own over the next five years, I’d go with Wesfarmers.
However, with over 2,000 other companies listed on the ASX (and tens of thousands globally), I’m in no rush to buy a share that I think is mildly expensive. I’d rather wait!
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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Wesfarmers Limited. 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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