The Wesfarmers Ltd (ASX: WES) share price has been on a bit of a rollercoaster ride in 2016.
All in all though, the company's share price is now in-line with where it was at the beginning of 2016. So is this your opportunity to buy shares in one of Australia's biggest companies at an affordable price?
Is Wesfarmers Ltd a buy at this share price?
At just over $41, shares in the owner of popular brands such as Coles, Bunnings, Kmart, Officeworks, Target and more, appear to be well priced. Indeed, although the company's dividend yield is forecast to be 4.7% fully franked, shares currently change hands for over 17 times next year's profits.
The price-to-earnings (or profits) ratio is a relative measure of value and, therefore, has to be put in context. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) currently trades at an average of 17 times last year's profits, while shares of companies in the consumer staples sector average around 13 times their profits.
Clearly, the market values Wesfarmers as the best operator in this space. And perhaps rightly so given the stable of brands (especially Coles and Bunnings) at its disposal.
However, one of the key risks facing investors in Wesfarmers is the uncertainty around its next stage of growth. Coles and Bunnings have done an exceptional job of fending off competition and pushing profits to new highs. While Bunnings is a clear winner in the DIY home improvement market and has many ways to grow. Coles' growth may be more subdued in the medium term due to the market's maturity, low inflation, competition and the potential for foreign rivals to enter the market.
With higher interest rates also on the cards, investors will be wise not to overpay for growth.
Buy, Hold or Sell?
At today's share price, most analysts rate Wesfarmers as a 'hold' and I agree. It is a good business, but I cannot help but think that we may get a chance to buy shares at a better valuation some time in the future.
