Wesfarmers Share Price Drops 3.6% on Short-Term Expectations

Wesfarmers Ltd [ASX:WES] fell as much as 3.66% this afternoon, to $39.99 per share. The retailer is now down 6.39% year-to-date.

What happened?

This morning, Wesfarmers presented their 2017 Strategy for the group. What caught investors’ attention was the Coles business. As reported by The Australian Financial Review:

Coles managing director John Durkan said the food and liquor retailer had tripled its investment into prices and service in the June-half to drive sales and regain market share.

The investment in prices and service had been made ahead of cost-savings, Mr Durkan said, suggesting that Coles’ margins were likely to come under pressure again in the June-half.

But it’s not just Coles that investors were sour about. Wesfarmers chief executive Richard Goyder said that the 18-month-old hardware business in the UK and Ireland could continue to lose money. In the first half of FY17, the new hardware business lost $48 million. Profitability isn’t expected until the second half of FY18.

What now?

To me, it seems like investors are being a bit nearsighted. The market tends to overreact on short-term changes and disregards what could happen in five to 10 years’ time.

That’s not to say Wesfarmers’ shares won’t decline from here. They could possibly fall even lower. The retail industry is in trouble, as margins are falling. Investors might look to put their money elsewhere.

However, Wesfarmers is trading at levels not seen in years. Based on expected earnings per share of 2.85-times for FY17, Wesfarmers has a price-to-earnings ratio of around 14-times earnings.

The last time Wesfarmers traded lower than 14-times earnings on a quarterly basis was in June 2009. So Wesfarmers is not down and out just yet. Sure, they are having some short-term troubles. But think of what will happen in the next five to 10 years.

That’s why I believe it’s worth looking into Wesfarmers to see if it’s a right fit for your portfolio.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

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