The string of bad news for Wesfarmers Ltd (ASX: WES) rolls on and this poses further downside risk for the stock which has been underperforming the market and its peers. The share price of the conglomerate is up a modest 1% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is nearly 4% ahead. On the other hand, Wesfarmers’ rivals Woolworths Group Ltd (ASX: WOW) and Metcash Limited (ASX: MTS) have run even further ahead with a 6% and 42% gain, respectively. Now there are questions if Wesfarmers’ crown jewel, Bunnings Warehouse, could become a significant drag as analysts…
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The string of bad news for Wesfarmers Ltd (ASX: WES) rolls on and this poses further downside risk for the stock which has been underperforming the market and its peers.
The share price of the conglomerate is up a modest 1% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is nearly 4% ahead.
Now there are questions if Wesfarmers’ crown jewel, Bunnings Warehouse, could become a significant drag as analysts start to question if Bunnings could end up costing more than Woolworths’ failed DIY superstore Masters.
The irony is that Bunnings has been a money printing machine for Wesfarmers and Woolworths started its Masters joint venture (JV) in an attempt to restrict the river of cash flowing into its archrival, who also owns the Coles supermarket chain.
The misadventure ended up costing Woolworths $2.6 billion, according to a report in the Australian Financial Review. Woolworths didn’t need Masters to damage Bunnings after all. They only needed to have waited for the ill-fated decision by Wesfarmers to expand overseas.
That seems to be a curse of many dominant Australian businesses. History has shown that they tend to look overseas at some point, which has led to many high-profile failures. Australia and New Zealand Banking Group (ASX: ANZ) and Telstra Corporation Ltd (ASX: TLS) are just two ready examples that come to mind.
Going back to Bunnings, management has written down $1 billion in the UK expansion and analysts warn that Bunnings UK may not breakeven till 2022. At that point, Bunnings UK could have burnt a $1.8 billion hole in Wesfarmers’ pocket.
What’s worse, if Bunnings UK can’t be turned around and it withdraws from that market, the total bill to shareholders could be as high as $3.2 billion!
A potential Bunnings UK failure is more painful than the Masters debacle because Bunnings UK is locked into long-term leases and Wesfarmers doesn’t have a JV partner to share the pain like Woolworths did.
The “Bunnings Bunion” comes on top of the bruising already inflicting Wesfarmers as its Coles supermarkets continue to lose market share to Woolies while its Target department store seems at a loss on how to turn around its fortunes and growth as its Kmart chain slows.
Wesfarmers’ shareholders had always been ready to forgive and forget thanks to the runaway success of Bunnings and the conglomerate’s coal assets, which have come back into favour due to the surprising strength in commodity prices.
Now it seems Wesfarmers may be grounded as it can’t take off with one-engine.
Investors have to wonder if Wesfarmers will face increasing pressure to demerge its many divisions this year.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers Limited. 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.