Is the Wesfarmers Ltd (ASX: WES) share price a buy?
It's had a pretty solid week, with the share price up by 3.4% in just five days, depending how the rest of Friday goes.
All eyes will be on the half-year result which is expected to be released on Thursday, 21 February 2019. So, we're just under two weeks away.
It will be the first time we get to see how the business is going without Coles Group Limited (ASX: COL) as part of the Wesfarmers retail stable that includes Kmart, Target, Officeworks and Bunnings.
Wesfarmers has been busily divesting many of its assets including Coles, Kmart Tyre and Auto Service, its 13.2% stake of Quadrant Energy and coal assets. A key question is what Wesfarmers will do next? Will it announce some exciting non-retail acquisitions? I hope so.
If it doesn't, Wesfarmers is relying on Bunnings ANZ to do most of the heavily lifting. We've already heard that things are tough at Kmart and Target.
About a month ago, management announced that in the half-year result Kmart will show total sales only increased by 1% with same store sales decreasing by 0.6%. Meanwhile Target sales increased by 0.2% with comparable sales growth of 0.5%. As a result, earnings before interest and tax (EBIT) for Department Stores is expected to be between $385 million to $400 million for the half-year.
The problem for Wesfarmers is that Bunnings could face difficulties too, if the housing market continues to be weak. The negative wealth effect is already hurting the sales growth of some businesses.
The Wesfarmers balance sheet improved net debt from $3.6 billion at 30 June 2018 to $0.3 billion at 31 December 2018. It has plenty of firepower to buy some other businesses.
Foolish takeaway
According to analyst estimates, Wesfarmers is trading at 16x FY19's estimated earnings with a projected grossed-up dividend yield of 8.2%.
I believe Wesfarmers will deliver a return that beats cash over the long-term, but I wouldn't call it a solid blue chip unless it acquires some non-retail businesses which can provide non-cyclical growth. I worry that Amazon will compress profit margins for several of Wesfarmers' businesses, particularly Officeworks.
