Is the Wesfarmers Ltd (ASX: WES) share price a buy? The coronavirus is throwing up an interesting question for many ASX blue chips.
Wesfarmers is known for a variety of different businesses including Bunnings, Officeworks, Kmart, Target and Catch. It also has other subsidiaries including an industrial segment and investments in businesses like Coles Group Limited (ASX: COL) and BWP Trust (ASX: BWP).
Wesfarmers recently sold another portion of its Coles holding. It sold a 5.2% stake for approximately $1.06 billion. It had sold a 4.9% stake for $1.05 billion in February 2020.
From its high in February 2020 the Wesfarmers share price has declined by almost 20%. However, that includes a 21.6% recovery since 23 March 2020.
How did the market react to the COVID-19 update?
Yesterday Wesfarmers announced an update. It rose by 0.3% in response.
What was in the update? Several different items. Management told us that its retail businesses have made a lot of progress enhancing its online sales offering, whilst dealing with a large increase in demand for products online.
It has done a few different things such as a 'drive and collect' at Bunnings & Officeworks, it has enabled contactless carpark collection by customers and it has converted three Kmarts into 'dark' stores to support online sales.
In terms of actual trading, both Bunnings and Officeworks have experienced a large increase of demand with more households spending time working, learning and doing projects at home. Growth in the third quarter and the first three weeks of April has increased compared to levels achieved in the first half of FY20. These two businesses are really supporting the Wesfarmers share price right now.
Sales growth in the third quarter for Kmart and Target was largely in line with what was achieved in HY20, with good online sales. However, recently in-store sales has slowed in Kmart and significantly dropped off in Target. The large fixed occupancy costs are hurting profitability for Kmart and Target, as well as the higher costs of fulfilling online sales. Kmart is still profitable, but Target earnings have decreased significantly.
Management are now trying to accelerate plans to improve Target. It's also doing a review for a number of actions to help shareholder returns and it's assessing strategic options for a commercially viable Target.
I like that Wesfarmers has recently extended its available debt facilities by $2 billion to around $5.3 billion. This is a big war chest to go for some beaten-up acquisitions if the price is right. The debt was priced lower than Wesfarmers' overall cost of debt.
Is the Wesfarmers share price a buy?
It's very hard to say what Wesfarmers' near term earnings will be considering COVID-19 itself is unpredictable.
Wesfarmers' earnings are clearly holding up reasonably well. Bunnings is performing strongly and it is the dominant profit machine for Wesfarmers. I'd prefer to buy it over the banks for income and its investment flexibility into different industries is attractive. However, there are plenty of smaller ASX shares I'd rather invest in for my portfolio.
