Is the Wesfarmers Ltd (ASX: WES) share price a buy?
One of the main benefits that investors point to about blue chips is that they are more reliable and suffer less during market volatility.
That argument can certainly be made about Wesfarmers, over the past month its share price has risen by 3.9%. However, when you look at the share prices of Appen Ltd (ASX: APX), WiseTech Global Ltd (ASX: WTC), Afterpay Touch Group Ltd (ASX: APT) and others you will see they are all down over the past month.
So it seems that a blue chip like Wesfarmers is indeed less volatile. However, volatility is something to be welcomed – it's the price of being in shares and it can present us with buying opportunities. When you look over just the past year, the growth of the share prices of the tech shares has significantly outperformed Wesfarmers.
Investors are becoming more hopeful that the economic sentiment turnaround we've seen since the federal election (and the RBA & APRA measures) will ultimately boost revenue and profit for retail businesses like Bunnings, Officeworks, Kmart and Target.
Only time will tell, although we can't expect that FY19 will look great for Wesfarmers compared to FY18 after it already warned that the earnings before interest and tax (EBIT) for Kmart Group (which includes Target) will show a sizeable profit decline.
However, I do like that Wesfarmers is taking steps to diversify and improve its earnings potential with the recent acquisition of Catch Group to boost its online retail presence and the acquisition of lithium business Kidman Resources Ltd (ASX: KDR). Lithium mining is a bit of a left-field choice, but if it works for Wesfarmers then management made a good choice.
Foolish takeaway
Wesfarmers is currently trading at 22x FY20's estimated earnings with a projected grossed-up dividend yield of 5.4%. I'm not sure how much Wesfarmers can grow profit in the short-to-medium-term, so the current valuation isn't very attractive to me on a PEG ratio basis.
