Since the Wesfarmers Ltd [ASX:WES] demerger of Coles Group Ltd [ASX:COL] in late 2018, the market has been anticipating what the cashed-up retail conglomerate will buy up next.
WES initially retained a 15% stake in the $21.46 billion supermarket giant, but as of 31 March has slashed that holding to 4.9%.
According to Wesfarmers, the mammoth conglomerate expects to make a pre-tax profit of approximately $130 million from the $1.06 billion sale.
Sitting on a pile of cash, many have begun to speculate what company WES will snap up next.
The Sydney Morning Herald reports that rumours are swirling around a potential Qantas Airways Ltd [ASX:QAN] bid, or even snapping up Star Entertainment Group Ltd [ASX:SGR].
Wesfarmers seem to be sitting pretty while other major companies struggle to keep their heads above water amid the coronavirus pandemic.
You can see how the WES share price has performed over the last 12 months below:
So, why has WES been slapped with a near unanimous chorus of sell recommendations from brokers?
Is the Wesfarmers share price built on a house on sand?
At some point markets will return to normal, leaving those who built their house on sand to lick their wounds and those who built on rock to soldier on.
So, it’s no surprise to see the WES share price down significantly since the COVID-19 outbreak spread beyond China’s shores.
WES is significantly exposed to the retail sector, with Bunnings, Officeworks and Kmart Group (including Target and Catch) accounting for the lion’s share of earnings.
In the first half of FY2020, Kmart Group recorded a 9.9% drop in earnings from $383 million to $345 million
Bunnings and Officeworks both performed modestly, increasing earnings by 3.1% and 3.9% respectively.
As these retailers remain open during government mandated lockdowns, I suspect revenue won’t be hit massively.
But with the broader retail sector on the slide, Wesfarmers faces a tough decision: stick with what it knows and add another retailer to its portfolio or branch out and diversify?
Wesfarmers’ other divisions, chemicals, energy and fertilisers (WesCEF) and industrial and safety have also slid in the first half of FY2020 following declines in energy prices and workwear sales.
WesCEF dipped 5.9% while industrial and safety shed a massive 85.7%
Plenty of cheap land
Wesfarmers have yet to hint at what they’re looking to buy, which makes it difficult to judge where their share price could end up.
Macquarie Group Ltd [ASX:MQG] has already been tasked with creating a shopping list for the cashed-up conglomerate.
Thirty-eight met WES’s strict criteria: shares down 30% or more from a three-year high, an enterprise value under $5 billion, a return on equity lower than their 10-year average and a history of profitability.
Many of these, however, fall into the retail category.
Right now, I believe Wesfarmers are likely to sit on their war chest during the current economic uncertainty.
Macquarie analysts say the company will likely to be conservative given the looming risk of shutdowns.
If I were to hazard a guess, when they do make a move it could be in the WesCEF division, after a well-publicised attempt at purchasing Lynas.
If you are sceptical about how your other blue chip shares may perform, our editor, Vern Gowdie (who called the 2020 market crash) has a valuable report on blue chip shares he thinks are way overvalued given current market conditions.
There’s a good chance you own these shares too.
If you’re wondering which stocks are worth selling and which are worth hanging on to, be sure to check out our free report: ‘Five Blue Chip Aussie Stocks NOW’.
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