Is the Wesfarmers Ltd (ASX: WES) share price a buy today?
It's been a pretty solid 2019 for the retail conglomerate, the Wesfarmers share price has risen by 8% in the year to date, plus shareholders are about to get a $2 per share dividend (which includes a $1 special dividend per share), which will add another 6.3% to Wesfarmers' 2019 returns.
Investors seem to be warming to the idea of the strength of Bunnings, which generated more than half of the earnings before interest and tax (EBIT) in the December 2018 half year report. Bunnings made $932 million of EBIT, Kmart & Target made $383 million, Officeworks generated $76 million and the Industrials segment created $227 million of EBIT.
The most pleasing part of the half year report was that Bunnings still managed to grow EBIT by 7.9% despite the apparent slowdown of construction, house prices and the Australian economy.
Wesfarmers' recent bid for Lynas Corporation Ltd (ASX: LYC) took nearly everyone by surprise. There are some synergy benefits that could be found from a tie-up due to Wesfarmers' chemical assets, but it would increase the risk profile of Wesfarmers, particularly politically.
The Prime Minister of Malaysia said last week that Lynas may continue to operate if raw materials are brought to Malaysia after initial processing, which would require Lynas to undertake the cracking and leaching process offshore.
Wesfarmers Managing Director Rob Scott said "We see the Prime Minister's statements as a positive step towards the resolution of longstanding regulatory and operating uncertainty for Lynas. With greater clarity around licence renewal and Lynas' plans to address these licence conditions, Wesfarmers remains open to engage with the Lynas Board on our Proposal, with a view to progressing a less conditional proposal."
Foolish takeaway
The demand for Lynas' rare earths is expected to rise in the coming years, and it would diversify Wesfarmers' earnings, but this seems like it will increase the risk profile of Wesfarmers.
It's currently trading at 19x FY20's estimated earnings. Whilst this doesn't seem overly expensive, I don't think it's the right time to buy to buy shares of Wesfarmers because its earnings may yet be hit due to the cyclical nature of retail spending.
