Stock of the day: Wesfarmers

(AI video summary)

This video was created on 20 December for IG audiences by ausbiz.

ASX code: WES

Coregas sale boosts Wesfarmers' financial strategy

Wesfarmers, a major player on the Australian Securities Exchange (ASX), has announced the sale of its industrial gas supply division, Coregas, to a Japanese multinational for $770 million. This strategic move is expected to bring a pre-tax profit of between $230 million and $260 million, highlighting Wesfarmers' continued focus on asset management.

Coregas, part of Wesfarmers' industrial division, is a prominent supplier of industrial gases across Australia and New Zealand. The sale reflects Wesfarmers' strategy of recycling assets to unlock value and potentially fund future acquisitions, a hallmark of its growth approach.

Evaluating Wesfarmers' price-to-earnings ratio

Despite the positive cash injection from the sale, Wesfarmers' earnings growth has not kept pace with its rising share price. The company's price-to-earnings (P/E) ratio has climbed to approximately 32 times, indicating a high valuation relative to its earnings. This has led to a 2.5% drop in its share price, as investors reassess the conglomerate's growth prospects.

Analysts suggest that Wesfarmers' diversified revenue streams provide a defensive quality, making it a stable option during market downturns. However, the high valuation may prompt investors to consider trimming their holdings unless there is a substantial earnings shift.

Future growth and investment strategy

Wesfarmers' history of mergers and acquisitions (M&A) suggests that the proceeds from the Coregas sale could be used for future investments. The company has previously engaged in significant acquisitions, such as lithium assets, although not all have yielded expected returns due to market conditions.

Investors are keenly watching how Wesfarmers will deploy its capital to drive growth. With a focus on retail and industrial sectors, and expertise in commodities, Wesfarmers is well-positioned to explore new opportunities. However, given the current high valuation, some analysts recommend holding or trimming positions while monitoring potential market corrections for re-entry opportunities.