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

Is the Wesfarmers Ltd (ASX: WES) share price a buy after its divestment of Coles Group Limited (ASX: COL)?

Some analysts are saying Coles is the business to buy, whereas others are saying that Wesfarmers is the better option.

We’ve seen in the past that large de-mergers, such as with South32 Ltd (ASX: S32), the smaller divested business can turn out well.

Wesfarmers management have been busy selling a number of its smaller operations including its coal operations and Kmart Tyre & Auto. It’s a much simpler business now.

What remains is company which is essentially a strong group of retail business including Bunnings, Kmart, Officeworks and Target. Perhaps Target shouldn’t be called strong, but the others are category leaders. It also retains a few industrial businesses.

Despite growing pressure from online retailers, Bunnings Australia & NZ grew earnings before interest and tax (EBIT) by 12.7%, the department stores grew EBIT by 21.5% and Officeworks increased EBIT by 8.3%.

I’m not too confident about Officeworks’ growth potential as many other electronic retailers have had a tough time in other countries. At the very least, I expect the Officeworks profit margins to come under pressure.

Bunnings is arguably Australia’s best retail business. Will it suffer from falling house prices and a negative wealth effect? Perhaps it will, only time will tell. It’s likely that growth will be lower for the next few years.

Kmart should continue to do well with price-conscious households. It has done excellently in recent times thanks to its low-cost products. We’ll see if the Target rejuvenation can improve its sales growth and profitability. The stores do look a lot better and more inviting, but retail conditions may just not work in its favour in the short-term.

The industrial businesses should be fairly recession-proof, but it’s the smallest contributor to Wesfarmers’ profit.

Foolish takeaway

Wesfarmers is currently trading at under 14x FY20’s early estimated earnings. I’m particularly interested to see what Wesfarmers management do next, future acquisitions could be integral for profit growth. I do prefer Wesfarmers to Woolworths Group Ltd (ASX: WOW).

I’m not a buyer of Wesfarmers shares until we get to see how the half-year result went and learn how Bunnings is going in the face of declining house 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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