Is the Wesfarmers Ltd (ASX:WES) share price a buy?

The Wesfarmers Ltd (ASX: WES) share price has gone up 20% over the past three months. This rise has been largely due to the market accepting  and being excited by management’s move to split Coles off into its own business.

Wesfarmers has a variety of businesses beyond Coles including Target, Kmart, Bunnings and Officeworks.

Without Coles as part of the business, Wesfarmers could be about to become a lot more profitable. Coles is a high-volume, low-margin business that has significant capital requirements.

Bunnings grew earnings before interest and tax (EBIT) by 12.2% in the half-year to 31 December 2017. When Bunnings is a much bigger part of the earnings pie its strong growth will have a bigger impact on the overall Wesfarmers result. Not many blue chips can point to double digit EBIT growth at the moment.

This move will unlock value and perhaps increase the earnings multiple even more, although that appears to have mostly been priced in.

However, I think it’s also worth questioning the value of the remaining businesses. Officeworks could be the worst hit by a growing Amazon presence – I have already experienced the ease of its online ordering and quick (free) delivery.

Target is also suffering from competition and perhaps struggling to find its niche like how Kmart and IKEA have in the low-cost space.

Is Wesfarmers a buy?

It’s trading at 20x FY18’s estimated earnings, which I think is reasonable value but nothing special. It also has a grossed-up dividend yield of 6.4%. Out of the ASX 10, I would put it among my preferred options, but behind Macquarie Group Ltd (ASX: MQG) at the current prices.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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 Scott Phillips.

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