Are Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) overvalued?
Much has been made of the recent growth of cut-price competitors like Aldi, Lidl, Costco, and now Kaufland. While our supermarket titans retain a considerable lead and it has taken years for Aldi to build a meaningful footprint, Woolworths and Wesfarmers' profit margins on their grocery sales have been falling in recent years, and many expect that grocery margins and earnings will fall further between now and 2020.
Both Woolies and Wesfarmers own businesses outside of the groceries, which also need to be considered. Woolworths has its petrol business, the hotels business, department store Big W, and the liquor business, with Dan Murphy's being practically a national fixture. Wesfarmers owns Kmart, Target, Bunnings, a coal mine, an industrial chemicals division, a safety division, and has its own liquor and petrol chains. Each of these businesses is worth a considerable amount on their own, although the department stores and the coal mine have had their troubles.
Most of these businesses are 'mature' – that is, they have limited room for expansion but large market shares, and in some cases, may be more vulnerable to competition or disruption. Some businesses, especially Bunnings and Dan Murphy's, would be worth considerably more if sold off to the public, however others like Officeworks and Big W are likely to meet a cool reception. One valuation suggests Woolworths could be worth $21 a share or less.
At current prices of ~16x earnings (Wesfarmers), and ~20x earnings (Woolworths) and with competition still intensifying, it's hard to argue that either conglomerate is outstanding value today.
If I had a choice I would prefer to buy Wesfarmers, and I am keeping an eye on this company for the chance to buy it below a sum-of-the-parts valuation, or in the event that it spins off Bunnings (the business I'm most interested in). However for now, I'm avoiding both companies entirely.
