Wesfarmers Undervaluation Makes For A Smart Buy

Wesfarmers Undervaluation Makes For A Smart Buy

There could be an easy way to reverse the underperformance of Wesfarmers Ltd’s (ASX: WES) share price.

The struggling conglomerate is likely to get a nice kick in its share price if it spun out its DIY warehouse Bunnings into a separately listed entity, according to a prominent fund manager who was quoted in the Australian Financial Review.

The market cap of a demerged Bunnings could touch $20 billion, or just a little less than half of Wesfarmers’ current $46 billion market value, estimates John Sevior from Airlie Funds Management. If this strategy was adopted (and executed well of course), it would almost certainly leave shareholders better off as Bunnings accounts for around a third of Wesfarmers’ total group earnings.

Management is reportedly resistant to the idea but may face growing pressure from shareholders if it doesn’t come up with a better way to turn around Wesfarmers’ poor performance with the stock slumping 5.6% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 2.4%.

The conglomerate’s stock is trading at a discount to the market too as it is on a forward price-earnings multiple of 16 times – a 15.8% discount to the industrials sector and an 8.6% discount to the ASX 200.

Technical Analysis

Overall, the bias in prices is: Downwards.

Short term: Prices are stalling.

Intermediate term: Prices are ranging.

The projected upper bound is: 41.96.

The projected lower bound is: 39.41.

The projected closing price is: 40.68.

Candlesticks

A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 5 white candles and 5 black candles. During the past 50 bars, there have been 26 white candles and 24 black candles for a net of 2 white candles.

Three white candles occurred in the last three days. Although these candles were not big enough to create three white soldiers, the steady upward pattern is bullish.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 62.4160. This is not an overbought or oversold reading. The last signal was a buy 3 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 49.07. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 34 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -2. This is not a topping or bottoming area. The last signal was a buy 4 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 1 period(s) ago.

Rex Takasugi – TD Profile

WESFARMER FPO SE closed up 0.200 at 40.730. Volume was 22% below average (neutral) and Bollinger Bands were 35% narrower than normal.

Open     High       Low       Close     Volume
40.550   40.930  40.530  40.730  1,756,355

Technical Outlook
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bearish

Moving Averages: 10-period   50-period   200-period
Close:                       40.52          41.05           42.21
Volatility:                14                 20                20
Volume:                  1,868,036   2,343,469   2,298,212

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

WESFARMER FPO SE is currently 3.5% below its 200-period moving average and is in an upward trend. Volatility is low as compared to the average volatility over the last 10 periods. Our volume indicators reflect volume flowing into and out of WES.AX at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on WES.AX and have had this outlook for the last 15 periods.

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Ivy Heffernan

Ivy Heffernan, student of Economics at Buckingham University. Junior Analyst at HeffX and experienced marketing director.

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