Woolworths Group Ltd (ASX: WOW) has announced its intention to separate itself from its liquor and hotels businesses by the end of the 2020 calendar year, retaining a minority stake in the business. Holders of the company may be concerned about the implications for Woolworths' revenue streams. At the time of writing, the Woolworths share price was trading at $33.92.

How will the Woolworths demerger work?

Demerging different elements of a business is a complicated exercise at the best of times, and the demerger of Endeavour Drinks and ALH Group is no different. In essence, those two businesses would be merged in the latter part of the 2019 calendar year. The combined entity would then be separated from Woolworths 'through a demerger or other value-accredited alternative' some time in 2020. This decision would be subject to shareholder approval at the 2019 AGM.

Why demerge?

Competition in the core food and supermarket business of the Woolworths group has been intensifying of late, and that looks slated to continue with increasing pressure from rival Coles Group Ltd (ASX: COL), disruptor Aldi, and 2019 newcomer Kaufland. Woolworths has indicated that the move away from its liquor (which notably includes the BWS chain) and hotels businesses is principally designed to allow the company to focus on the core food and essentials markets.

Woolworths financial analysis

Like any large business, the structure of Woolworths is somewhat complex. It appears that the management of Woolworths view the decision to step away from the bricks-and-mortar operations of its liquor and hotels business as one that is aimed at reducing the complexity of its operations, and perhaps to facilitate a move toward an increased online, on-demand offering.

The financials remain strong for the company, however, with earnings-per-share expected to continue growing by 6.6% annually through 2020 and 2021. During that same time, revenue is expected to climb from $60.297 billion in 2019 to $63.532 billion in 2021. Dividend yield is expected to reach 112.2 cents by 2021.

Other headwinds

The company is also experiencing some difficulty with the Big W arm of its business operations, which it attempted to address in April 2019 when it announced the rolling closure of some 30 locations of the chain over the next three years. If the company fails to return the Big W arm to profitability, it will continue to dent the earnings of the Woolworths Group.

Foolish takeaway

Despite the strong financials discussed above, there are a number of potential headwinds. The complexity of the proposed demerger means that it is very difficult to predict the impact it will have on the earnings of the Woolworths Group. Although the strong dividend yield in particular make it an attractive prospect for investors, it may be more prudent to wait for the consequences of the proposed demerger to become clear before jumping in.

The post Is the Woolworths share price still a buy? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tom Clelland has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Fortescue Metals Group Limited (ASX: FMG) share price has had a dream year so far, rocketing from as low as $4.47 in early January 2019 to close yesterday at $8.85. What exactly is driving these changes, and is the run over?

Iron ore bounces back

Andrew Forrest's Fortescue Metals Group is one of the largest iron ore producers in the world, with global exports from a number of mine sites throughout Western Australia. As most readers would know, the largest purchaser of iron ore produced by FMG is China; in FY18, 80% of the company's revenue was generated by purchases originating in the country.

Currently, the benchmark iron ore price is around US$115 per tonne, which represents a nearly 50% increase since the beginning of the 2019 calendar year. Fortescue, like most companies that deal in the export of commodities, benefits greatly from this increased price.

The above is occurring in the context of increased demand for steel from Fortescue's largest consumer, China, which is largely a result of domestic stimulus measures instituted by Beijing.

Dividend ahoy

Even though FMG announced a 60 cents per share return in May 2019, there is still speculation that a strong August dividend remains in play for the company. This speculation is of course driven by the strong earnings numbers as a result of the phoenix-like rebirth of the iron ore market. It remains to be seen whether such a dividend will be announced, and what percentage return could be expected.

The outlook for Fortescue

As many investors learned over the past few years, Australian mining is often at the whim of larger market forces. In the case of Fortescue, the two driving forces are demand for steel in China, and the benchmark price for iron ore. The two are of course related, in the sense that China's increased consumption of iron ore necessarily raises the benchmark price. Speculation as to the future earnings of Fortescue will largely depend on where the above factors are headed in the coming months and years.

Foolish takeaway

Fortescue Metals Group is in an intriguing position. Market tailwinds have conspired to make the company an extremely attractive prospect in the short term, but significant questions remain in the longer term. Prospective investors should carefully consider the future of both steel demand in China, and the iron ore benchmark price, before diving in to Fortescue. If you are bullish on the future of iron ore exports, however, Fortescue presents a strong candidate.

The post Why the Fortescue share price is up nearly 100% YTD appeared first on The Motley Fool Australia.

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Motley Fool contributor Tom Clelland has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Just over a week ago, Xero Limited (ASX: XRO) announced its acquisition of Hubdoc, yet another in a line of moves that flag the company's aggressive growth policies.

Hubdoc provides technological solutions to streamline the administrative side of the accounting practice, and has been a crucial part of Xero's 'ease of use' approach to small business accounting. To some, the acquisition was not a surprise, but to others it is another sign that Xero intends to continue the strong growth trend that has characterised the business in recent years.  

Xero has been here before. After peaking at $41.85 in March 2014, the company's share price slumped to below half of that value on the back of competition from other firms in the sector such as Myob Group Ltd (ASX: MYO).

The retracing has been gradual, but Xero is once again at its pinnacle, and the question now is whether investors are set up for further growth or a similar disappointment.  

Speculation abounds. Most recently, fund manager John Hempton told The Australian Financial Review that the company's market capitalisation could reach $100 billion in the future. Billion, with a 'b'.

Whether or not this is hyperbole is a matter of debate. Proponents of the company cite its growth in the USA as a harbinger of huge revenues to come, but others are more sceptical.  

Xero Limited's Model 

In a recent interview with Commsec Market Analyst, Tom Piotrowski, Xero's COO & CFO Sankar Narayan discussed the implications of continued growth upon the business' makeup.

In particular, Narayan pointed to the benefits Xero is seeing from its growth in different markets around the world. Software as a product is somewhat unique, in that all customers are to some extent using the same product.

In theory, this means that all users benefit from the improvement and augmentation of that product as a whole. Narayan points to this as a central reason for the strength of Xero's platform. The larger it becomes, the better and more attractive its software solutions are to prospective customers. 

Financials 

Xero has delivered a one-year shareholder return of 86.8%, and a 5-year compound return of 24.7%, notwithstanding the company's turbulent 2014.

The company has recently transitioned to a sole listing on the ASX, ending its listing on the New Zealand Stock Exchange (NZX), which has had a positive effect on the firm's liquidity; annual turnover was 86% up from 13.4% in the previous financial year.

One-year cashflow growth is up 1,059%, while earnings growth is up 58.6%, indicating a strong move towards profitability for the company, which posted a net loss of $26.2 million for the 2017/2018 financial year.

This company is an example of the limitations of the price to earnings ratio in analysis as even when Xero does post a profit, Commsec forecasts its one-year P/E ratio to be 532.30. 

Foolish takeaway 

Xero is obviously trading on huge expectations that its aggressive growth strategy will pay off in the long run. The question will be whether these huge profits materialise to the degree that the market currently expects.

The answer to this question will depend on the company's ability to continue to innovate and provide a product to customers that is a serious alternative to other players in the competitive sector.  

The post How high can the Xero Limited (ASX:XRO) share price go? appeared first on The Motley Fool Australia.

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Kogan is a divisive company. Depending on who you speak to, it is either overvalued and doomed to be subsumed by Amazon's expansion into Australia, or a forward thinking disruptor that will beat American giants at their own game. This duality of opinion has  been reflected in recent share price volatility; after nearly hitting the $10 mark in early June, Kogan closed at $6.82 on Friday. So what has been driving this action?

Changes in Director Holdings

In early June, media speculation regarding a large sale of shares by company directors Ruslan Kogan and David Shafer depressed the company's share price, which was a hair's breadth from the elusive $10 mark.

Interestingly, this speculation occurred in the midst of the company's announcement that it was moving into the white goods space, further diversifying its revenue streams and causing a run in the share price of nearly 8 percent.

In response to the speculation, Kogan made an announcement stating that no such transactions had occurred, and that Mr Kogan and Mr Shafer were 'not currently in discussions to sell any shares'. The key word being 'currently'. Both of the directors have since sold large parcels of their shares and speculation abounds.

There are two competing narratives. The sale of shares may be a bad omen, indicating the directors are seeking to hedge their positions and are a little more pessimistic as to the future performance of the company. It may also be a harmless example of company directors cashing in for their hard work after a year of stellar results.

Amazon Speculation

Amazon's recent expansion into the Australian market is making investors question whether Kogan's strong performance can continue in the wake of the American giant's expanding position, which has contributed to the recent volatility. In a difficult retail environment, Kogan has demonstrated strong revenue growth, but there is a looming question regarding the company's long-term future.

Kogan's answer to the question is diversification of revenue streams. The idea is simple; use the extremely low cost of customer acquisition that Kogan has created through its strong online presence to partner with companies in other sectors in a mutually beneficial arrangement. Those partners then have access to new customers, while Kogan investors gain access to infrastructure (such as a mobile network) without the corresponding investment.

The question is whether ventures such as the recent forays into pet insurance and white goods, or  the expansion into the New Zealand Mobile market will be enough to weather the storm as the retail sector continues to tighten. Although the outlook is tougher than ever before, Kogan and his team have a track record of repeatedly out peforming expectation.

Foolish takeaway

For those that believe in the Kogan model's ability to deliver revenue growth into the future despite the headwinds, Kogan may still be an attractive proposition. However, Kogan's P/E ratio of 187.36 demonstrates that a large portion of the company's market capitalisation is contingent on forward performance and future profit development, and for my money there are safer options in other sectors for savvy investors.

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WiseTech Global Ltd (ASX: WTC) has recently enjoyed a stellar run, with cashflow up 132.9% and earnings up 106.8% respectively in the previous 12 months. The company, however, is currently trading at an astronomical P/E ratio of 118, which may give pause to even the most risk-happy investor.  

Despite its strong financials, it is my view that there are lingering questions about WiseTech's future, and whether it is a buy at its current price. 

What do WiseTech Global do? 

Wisetech is essentially a developer of cloud-based software solutions for the global logistics industry. If this seems a little incomprehensible to you, you aren't alone. In simpler terms, the company creates software programs that manage the transportation, delivery, warehousing and other logistical concerns involved when businesses move either goods or information.  

An effective software program in the logistics arena will deliver more profitability for the firms that use it in the form of increased efficiency and productivity. According to Wisetech, the company's flagship program (CargoWise One) does just that.  

The Good 

As mentioned above, WiseTech's financials, particularly in the last 12 months, have been cause for elation on the part of the company and investors alike. Wisetech has delivered a one-year shareholder return rate of 126.9%, with astronomical growth in the last few months in particular. The company is clearly finding clients who believe in the software's ability to deliver value, and that is reflected in Wisetech's strong performance.  

Barriers to Entry 

One concept of the ideal company is a strong performer in an industry with high barriers to entry. For example, look no further than the stalwart CSL Limited (ASX: CSL).

In my view, there is an issue in the software industry over relatively low barriers to entry. Wisetech has spent a considerable amount in R&D, but that does not change the fundamental truth that the software industry is one with relatively low barriers to entry. Software development is democratised, and there is very little to stop disruptors from entering the game. 

As a corollary of the above point, there are also no geographical barriers to entry in software. Wisetech's target clients are firms with multi-national operations. This means that Wisetech needs to compete with software producers not just in Australia but across the entire world. As international business operations grow, so too does the competition in the industry. Notwithstanding Wisetech's performance to date, it is useful to keep this in mind. 

The Hype 

Although P/E ratio does not tell the whole story, in my view WiseTech's P/E of 118 (the average P/E of the software & services sector is 28) merits further inquiry. This number is obviously a reflection of the market's sentiment regarding the future of the company, but I would argue that there is a willingness on the part of the market to overestimate the potential of tech companies in particular.

Look no further than the ignominious performance of GetSwift Ltd (ASX:GSW), although unlike Wisetech this company never had any revenues or profits to speak of.

GetSwift is another logistics software company whose share price raced to a 52-week high of $4.60 on the back of investor excitement about the burgeoning logistics industry before a spectacular crash to its current value of $0.30 when it became clear that investor enthusiasm had vastly outpaced reality. 

I am not suggesting that WiseTech is the next GetSwift; this is simply a cautionary tale regarding the market's enthusiasm for companies of this kind. 

Foolish takeaway 

WiseTech's strong financials and performance have made it a very attractive and rewarding prospect for investors. However, before deciding to buy, prospective investors should take heed to consider the merits of the company itself, and not be swept up into the market's evident enthusiasm for the next big tech company.  

The post Is Wisetech Global Ltd a buy at this share price? appeared first on The Motley Fool Australia.

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When it comes to healthcare stocks, it is hard to look past the ASX stand-outs of CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH).

There is, however, a quieter story that may offer value to investors that parallels these two ASX stalwarts.

Notwithstanding RESMED's (ASX: RMD) stellar run over the last nine months, it remains an attractive proposition for investors for the following reasons.  

The Future of the Sleep Apnoea Market 

It is common knowledge that the developed world is currently undergoing an obesity epidemic, the proportions of which make it one of the most troubling public health challenges in the modern era.

One of the associated challenges is the ubiquity of related health disorders, one of which is the condition of sleep apnoea, which is estimated to impact around 5% of the population of the United States.  

As the obesity epidemic continues to grow, so too will ResMed's market for sales of its cutting-edge CPAP (continuous positive airway pressure) devices.

These devices are essential in providing quality of life to sufferers, and ResMed is one of the world's leaders in their development. If anything, ResMed's market seems slated for strong growth in the coming years. 

Innovation 

The company is not sitting on its hands with regard to its product. Instead, ResMed is constantly innovating in an attempt to keep pace with the increasingly technology-reliant healthcare sector, and now claims to have more than 5 million devices that are remotely connected to the cloud, enabling easier patient monitoring and treatment.  

Geographically Diversified Revenue Streams 

ResMed also offers fantastic georgraphic diversification. Earnings come principally from  the United Staes (59.5%),  with Germany (7.4%), and the rest of the world including Latin America (33.1%) making up the difference.

This diversity offers an increased buffer against financial headwinds that would trouble a company that was completely reliant on one market. For those seeking to diversify and mitigate against risk, this makes ResMed one to really consider.  

Strong Financials  

For the first time, ResMed's earnings per share hit an FX-adjusted 20 cents in the first half of the 2018 financial year, and it has delivered a one-year shareholder return rate of 42.7%, considerably outstripping its 3-year average of 26.6%.

Although ResMed is still a pricey proposition with a price to earnings ratio (PE) of 30 (contrasted with 18 for the sector), I think that the earnings growth is an indicator that it is still an attractive proposition for investors.  

Foolish takeaway 

Many view the price to earning ratio of a company as the most important metric for determining whether or not to invest. However, I would argue that ResMed is still an attractive proposition despite its high P/E. An expanding market and cutting-edge technology mean that ResMed may outperform some already-lofty expectations, and it is definitely one to consider.  

The post Why I think RESMED (ASX:RMD) offers great value at this share price appeared first on The Motley Fool Australia.

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