Ord Minnett has recently reviewed its investment thesis for Wesfarmers and consequently cut its recommendation to Hold from Accumulate following recent strong share price performance. Our price target remains at $45.50.
Wesfarmers has enjoyed strong share price performance in the last six months, reaching the upper end of the trading range it has enjoyed for several years. However, negative earnings revisions from Coles are likely to weigh on share price sentiment.
Woolworths (WOW, Accumulate) is our preferred exposure in consumer staples. The Wesfarmers price/earnings multiple remains lower than that of Woolworths, but its retail rival enjoys higher forecast earnings growth and no exposure to the lower-multiple industrial divisions in the Wesfarmers group.
We have modestly adjusted our earnings estimates for Wesfarmers, reducing Coles’ earnings before interest and tax forecast following the decline in the first half of FY17, with the weakness being skewed to the second quarter and needing to be annualised in our forecasts.
Ord Minnett has also reduced its earnings estimates for Bunnings due to a moderation of the trajectory of earnings growth in its UK and Ireland operations, while we also incorporate slightly lower volumes in our estimates for the resources division.