Should you buy Metcash or Wesfarmers stock now?

I like the impressive hardware divisions of both of these businesses.

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Metcash Ltd (ASX: MTS) stock and Wesfarmers Ltd (ASX: WES) stock are both impressive businesses. I think they're both worth owning for the long-term, but which is a better buy?

Neither company is a household name, but we all know the businesses they own/they're involved with.

What do these ASX shares do?

First, let's compare what the companies actually do.

Wesfarmers owns Bunnings, Kmart, Target, Priceline, Clear Skincare Clinics, Catch, Instantscripts, various industrial businesses and a division called Wesfarmers chemical, energy and fertilisers (WesCEF).

Metcash supplies a wide range of independent food and liquor businesses including IGAs around the country, Cellarbrations, The Bottle-O, IGA Liquor, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop and Duncans.

Metcash has a hardware division that includes several businesses, including Mitre 10, Total Tools, and Home Timber and Hardware. It also supports independent hardware operators through the small-format convenience banners Thrifty-Link Hardware and True Value Hardware, as well as some un-bannered independent operators.

Metcash recently announced it was acquiring a few other businesses. One is foodservice distributor Superior Food (which supplies businesses). The second is construction and industrial supplies business Bianco Construction Supplies which operates in South Australia and the Northern Territory. The third business is Alpine Truss, one of the largest frame and truss operators in Australia.

Before deciding which one is a better buy, it's important to note that both make a lot of their profit from hardware, though there are other segments that diversify their earnings.

Metcash or Wesfarmers stock?

I'll repeat what I said at the start of the article, I think both businesses are solid options for the long-term.

Wesfarmers is one of the highest-quality ASX blue-chip shares, with a strong return on equity (ROE) and high returns on capital (ROC) for the main businesses of Bunnings and Kmart.

However, the Wesfarmers share price has jumped 27% over the past six months. It doesn't surprise me – the company's retail performance has been solid despite households facing economic challenges. During this period, Kmart and Bunnings pride themselves on offering good value to customers.

The rise has put the Wesfarmers share price at 29x FY24's estimated earnings, according to the estimates on Commsec.

Metcash is on a much lower price/earnings (P/E) ratio. According to Commsec, the Metcash share price is trading at 14x FY24's estimated earnings.

Wesfarmers may be able to grow its profit faster than Metcash in the next few years, but the Metcash earnings multiple is at a significantly lower level.

A lower valuation means Metcash can provide a much more appealing dividend yield. According to Commsec, the FY24 grossed-up dividend yield from Metcash could be 7.3% and from Wesfarmers, it could be 4.2%.

For a medium-term investment timeframe, such as three to five years, I'd pick Metcash stock. However, due to the strength of the businesses and the ability to expand into new sectors, I'd choose Wesfarmers for a buy-and-hold-forever approach.

Motley Fool contributor Tristan Harrison has positions in Metcash. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Metcash. 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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