WES - Wesfarmers Limited

Both lows that were the ground for the bullish trend to continue were taken out today(in yellow). I expected that WES will hold strong relative to WOW which is entering in a crash stage, but market sees that selling both is the right thing. This technical development leaves two scenarios, both bearish.
First is that wave (4) is in progress, with final wave C in operation. Though it started to decline in three waves from wave B top, but sometimes less likely scenarios are on the scene, unfortunately. I will monitor how this scenario develops, but if $37,75 is taken out, most likely larger bear is in progress, which is the second alternate.

Under this scenario all Five waves from 2009 bottom are in place (per grey Alt. line)and the large correction is on its way, that probably will carry prices back to GFC lows in the years to come.

I started to notice that bullish counts on many stocks just seems to refuse to develop further after the March All Ords Top at ~6000, which only increases suspicions that this top was Terminal. Still no evidence on the Table(five down/three up) to confirm this on the Index, but such stocks like TLS, WOW and now WES are only adding more weight in favour to bears.
The bottom line is to determine this well in advance, not when the GFC lows will be taken out and when it will be too late to sell.

Wesfarmers looks to 'Master' the UK. :shake:

http://www.afr.com/brand/chanticleer/wesfarmers-takes-first-step-offshore-with-bunnings-uk-push-20160113-gm5jtj

Wesfarmers is a dog company with dog management and a dog board of directors.

Earnings Per share in FY2006 was $2.84 or $2.356 if you exclude the one of gain from the sale of a subsidiary. Based on the $2.356 EPS figure Return on Equity was 31.1%

Fast forward to the forecast result for FY2016. They will likely earn somewhere around $2.50 per share if you exclude the massive write-downs and restructuring costs which are supposedly one off (I doubt it). That is roughly a 6% (total increase, not the annual increase) increase in "underlying" EPS (earnings actually went backwards on a statutory basis) in ten years. That is far less than the rate of CPI inflation.

In the interim they have injected a massive amount of equity into the business of over the past ten years because they issued a lot of shares to purchase Coles and then issued more shares during the depths of the GFC after the share price had tanked (worst timing ever) to reduce the debt used to help fund the acquisition. Also they retained a fair bit of earnings over the past ten years.

They will be lucky if they can get a return on equity of 10-12% this year (excluding "one-off" costs). This is down from over 30% ten years ago.

Meanwhile each year the management and board of directors as a group collectively are paid tens of millions of dollars for this woeful performance. If you add up the compensation of the board of directors and the top 20 or 30 executives (the Wesfarmers group ones and the subsidiary ones) collectively they would have received hundreds of millions of dollars over the past ten years for this woeful performance.

The massive write-downs at Target and the coal business coupled with the previous accounting scandal at Target and the ill-advised U.K. hardware chain acquisition are signs of the continued ineptness of the board and management.

Bunnings is a badly managed company that has only done well in Australia due to the piss weak competition. If they were operating in the U.S. or U.K. market they would have shut down years ago.

Before Richard Goyder came along (incidentally a year into his reign EPS peaked) Wesfarmers was a very well managed and disciplined company. Then a Muppet named Richard Goyder came along and ****ed everything up by overpaying for Coles, poorly timing a capital raising in the depths of the GFC, investing badly in the resources division (very pro-cyclical as opposed to counter-cyclical) and poor oversight of Target not to mention their U.K. hardware chain acquisition which will likely end in tears.

I wonder what brought that on?

oldblue said:

I wonder what brought that on?

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A bad customer experience at Bunnings?

I don't disagree with much of what he's saying though. WES under Michael Chaney was really a quite a great company. It was discipline with it's growth and financially focused. Taking over Coles immediately prior to GFC damaged it's balance sheet, and subsequently, ROE substantially. Although you have to give credit to the operational team for turning Coles around to the point that it has Woolies' throat under its boots... financially it hasn't been done that efficiently.

But... thanks to the low interest rate and the magic of earnings multiple expansion, WES can still enjoy record share price not that long ago.

skc said:

But... thanks to the low interest rate and the magic of earnings multiple expansion, WES can still enjoy record share price not that long ago.

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I haven't had a look in a while.

But from what I remember, if you compare the divisional performance of what they owned in 2015 to what they owned pre-Coles acquisition in 2007 the comparatives are pretty similar despite 8 years passing. Everything has arguably gone backwards except Home Improvement. You'd also need to adjust for the few things they've sold (ie. the insurance book).

Value Hunter, it's not really far to say that it's significantly damaged their ROE without providing a hypothetical situation of what it might look like 8 years later if they didn't buy the Coles Group.

I would argue that the earnings multiple has increased because they can plough excess capital into a profitable franchise (which, except for Bunnings, was not possible before the Coles acquisition).

Its hard to say what the financials would have been like had Wesfarmers not acquired Coles. Because who knows what else they would have done. If they acquired no businesses they would be doing even worse now due to the bad performance from the resources division. However if they bought another business at a later date who knows.

As to being able to re-invest in a profitable franchise:
-Going forward in the next 5-10 years, Coles will (despite the 1-3 year outlook being rosy) face a dramatic slowdown in earnings growth due to Aldi and Costco continuing to take market share and push prices and margins lower across the industry.
-Bunnings will do well in Australia, but in my opinion this will be counterbalanced somewhat by the U.K. hardware division doing poorly in the future (Wesfarmers is woeful at retailing and will not be able to compete effectively in a highly competitive overseas market liker the U.K.)

So, if there's a difference between the historical ROE (which obviously includes the goodwill) and the incremental ROE from future investments, which would you use if valuing the company?

It appears from:

They will be lucky if they can get a return on equity of 10-12% this year (excluding "one-off" costs). This is down from over 30% ten years ago.

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that you are only considering the historical ROE.

Which, in my opinion, isn't correct.

Ves, I hear what you are saying, but my counter to that is its for the most part it is the same board of directors and management team that were in place when the Coles acquisition happened which bloated the balance sheet with a lot of goodwill which is arguably worthless and hence destroyed a lot of value. To say that the same idiots will not make further idiotic mistakes in the future which will depress incremental ROE would be an overly optimistic assessment.

Based on my previous post I think long-term future incremental ROE will decline because resources will remain in the doldrums, Coles will suffer from a stronger Aldi and Costco (and potentially a rejuvenated Woolworths) and the U.K. hardware acquisition will do poorly thus weighing down Bunnings. Also I am not convinced that both K-Mart and Target can be strong performers simultaneously in the future.

For some reason I have just been wanting to short this for a week or two. Before looking at any chart even or thinking too much about it other than Coles has had it's day in the sun.
It will be interesting to see how Masters breaks up. It would be great if someone bought out some of the better performing stores and sold the rest and provided a genuine alternative to Bunnings.
The obvious candidate would be MTS and add the good ones to Mitre 10 franchise. But don't think they have the gumption at this point and it would probably freak out share holders.

Never the less Gods are telling me to short WES.
Time will tell if I just need to take my meds.

WES seems to have jumped the shark. I waited until it went ex div and sold.

I reckon if it goes below $42 it will meander down to $34 before stabilising.

gg

The only thing going for Wes, is a nimble management, it will take nerves of steel to navigate through the next two years.

Management has always been good at the conglomerate.

I think WES will pause at $36 which has been support and resistance in the past.

The RSI on the five year weekly chart is definitely a worry.

gg

sptrawler said:

The only thing going for Wes, is a nimble management, it will take nerves of steel to navigate through the next two years.

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Well Morgan Stanley have an underperform on WES today (via The Australian) and reckon $36 is it's fate.

They must have been reading ASF.

gg

Garpal Gumnut said:

Well Morgan Stanley have an underperform on WES today (via The Australian) and reckon $36 is it's fate.

They must have been reading ASF.

gg

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WES is pretty well nothing but a yield play really , at 38 bucks its at 5% FF . I think only way it goes much lower is on a market wide selldown ( index ) . hell at 38 I might even get interested for a SMSF trade .

A number of events could lower profits and the div. yield however, Q.

A failure of Bunnings in the UK and Ireland.
The Amazon effect on Officeworks, Coles and even Bunnings here.
The coal price and or currency fluctuations for coal.

I'd not jump in for my SMSF, at $36, in fact I sold all my SMSF WES after they went ex-div this year.

Then again they have survived for a long time with good initiative and management. The price will recover from $41.37, it went as low as $40.70 today if Elliott Wave theory holds, although it may dally about $40 for a while until the next move down.

gg

Quant said:

WES is pretty well nothing but a yield play really , at 38 bucks its at 5% FF . I think only way it goes much lower is on a market wide selldown ( index ) . hell at 38 I might even get interested for a SMSF trade . View attachment 71378

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Garpal Gumnut said:

A number of events could lower profits and the div. yield however, Q.

A failure of Bunnings in the UK and Ireland.
The Amazon effect on Officeworks, Coles and even Bunnings here.
The coal price and or currency fluctuations for coal.

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I wont be in WES long enough for any of these events to have effect . I am a trader not an investor . 4-8 week holds about my space . Time is risk and in that period i will likely return > the average annual super return . Rock on

Quant said:

I wont be in WES long enough for any of these events to have effect . I am a trader not an investor . 4-8 week holds about my space . Time is risk and in that period i will likely return > the average annual super return . Rock on

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Not a bad way to go if your stocks trade in a range in a SMSF.

gg

I'd be watching the volume and price this afternoon on WES due to the ASX selloff.

If it goes below $40.50 with another 1 million trades it could reach or even break below $40.

I pity anyone holding on to WES for the divi atm.

Once it's gone ex-div WES will drop to $35.

It's not a bad outfit.

I plan to go back in when it approaches $32 ( sold for $44+ about 6mo ago)

gg