The Wesfarmers Ltd (ASX: WES) share price has recovered after the disappointing news it announced earlier in the week, is it a buy?
Wesfarmers is the retail giant that operates Bunnings, Officeworks, Kmart and Target. It used to operate more businesses, but it has been busily divesting assets including Coles Group Limited (ASX: COL) and Kmart Tyre & Auto.
Management also reminded investors of the gains on disposals of Bengalla for $670 million to $680 million and the US$98 million gain of its stake in Quadrant Energy.
When you add all these divestments together it has managed to reduce its net financial debt from $3.6 billion at 30 June 2018 to $0.3 billion.
There has been a lot of speculation about what Wesfarmers will do with its new financial strength and strong balance sheet. There were rumours it was looking at Healthscope Ltd (ASX: HSO) and Fletcher Building Limited (ASX: FBU), but nothing happened there.
If Wesfarmers were to enter another industry other than retail I would be more attracted to considering buying its shares.
Retail looks like a pretty tough place to be right now. Indeed, Wesfarmers said that in the December 2018 half-year Kmart same store sales actually went backwards from 0.6%, although total sales did increase by 1%.
The reason for the weaker Kmart sales included poor apparel sales and moderated growth in 'everyday' products compared to the prior corresponding period which saw significant growth in units.
However, Target did manage to report total sales growth of 0.2% with same store sales increasing by 0.5%.
The worry I have is that the poor Australian house market conditions are causing Australian consumers to close their wallets to discretionary spending. I'm not sure if it's a good sign or bad sign that we didn't get to hear about Bunnings, which is the key profit driver without Coles. The growing presence of Amazon probably isn't helping things.
Foolish takeaway
Wesfarmers is currently trading at around 16x FY19's estimated earnings. This is a fair price, but I don't think it's going to beat the market over the next couple of years unless Wesfarmers acquires a non-cyclical growing business to help grow earnings.
