Is the Wesfarmers Ltd (ASX: WES) share price a buy?
Wesfarmers has been very busy making a number of divestments in recent history including Kmart Tyre and Auto as well as some of its resource assets. Don't forget that it dropped the disappointing Bunnings UK & Ireland as well. It made the huge divestment of Coles Group Limited (ASX: COL) a month ago.
Other than some industrial businesses, Wesfarmers is now essentially a retail conglomerate.
Kmart, Target, Officeworks and Bunnings are the four musketeers that Wesfarmers management hope to grow profit.
On an earnings before interest and tax (EBIT) level, Bunnings Australia & New Zealand is the key. In FY18 it generated $1.5 billion, compared to $660 million of EBIT for the department stores and $156 million from Officeworks. Hopefully the falling housing market doesn't have a negative effect on Bunnings' earnings.
I've been very impressed by Kmart's performance in recent years. In FY18 alone it increased total sales by 8% on the back of comparable sales growth of 5.4%. If the Australian household budget is going to tighten up a bit, Kmart is likely to continue to do well if the strength of overseas stores like US dollar stores and the UK Poundland stores is replicated here.
I am fairly wary of what effect Amazon may have on Officeworks. That's probably why Wesfarmers was looking to offload it. The volume of sales may not hurt much, but margins could deteriorate because the consumer can easily price-match to online prices from Kogan.Com Ltd (ASX: KGN) and Amazon.
At the moment I am not looking to buy Wesfarmers shares because there is a fair chance of a retail slowdown, which wouldn't be good for short-term earnings.
However, if Wesfarmers were to use its balance sheet to acquire businesses in other industries then the conglomerate could be worth a buy then, but not yet in my opinion. I think there are shares out there that are more defensive or have better growth potential than Wesfarmers.
