Mar

10

WES

Posted In: Investing Tips

Getting the offer right

Wesfarmers’ chief executive, Richard Goyder, is publicly re-stating his belief in the company’s decision in November 2007 to pay $19.7 billion for Coles and the other retail businesses. Privately he may be breathing a small sigh of relief that the early financial signs of success are peeping through. But he rightly cautions the market to understand there is much more work to do before the returns on the investment can be deemed acceptable.

“The job of miracle-worker was handed to Guy Russo and he has not only found a heart beat in the discount department store (Kmart), he has given it a shot of adrenaline”

Please note that prices have been adjusted (by a factor of 0.940642) due to a rights issue. Fat Prophets initially recommended buying Wesfarmers around $15.05 in November 2008 (Fat 399). Our last review of this stock was in December (FAT453).

Wesfarmers has posted further gains reaching a high of $32.16 on January 5. A sharp retracement saw Wesfarmers touch a recent low of $26.76 on February 5, finding support at the uptrend line. Wesfarmers has since gained strong investor strength breaking above the long term moving average to reach an intraday high of $32.01 on February 22. Should a successful break above the $32.16 evolve, we would expect the 61.8% Fibonacci retracement level at $34.02 to become the next target level.

On the flipside, the relative strength index has entered the overbought region as shown on the daily chart. This indicates a possible pullback in price or slowing in buying pressure ahead. In addition, the January 5 high is likely to result in some selling pressure, which could lead to a period of consolidation.

The main theme in our investment in Wesfarmers has been the opportunity to participate in the rehabilitation of what were previously good retail businesses turned bad. In a broad sense, this has steadily played out since Wesfarmers began the long road to redemption of these well known brands – Coles, Target, and Kmart.

At a high level, installing experienced management with demonstrable track records was a pre-requisite. So far, they have tucked into their respective tasks with enough vigour to stave off any criticism, leaving Wesfarmers’ group management to field the questions on timing, capital allocations, and general progress to date.

In the latest interim result announcement, the market was pleasantly surprised at the progress in Target and Kmart particularly. Both delivered results that raised eyebrows and expectations at the same time. The early changes at Coles appear to be gaining some traction with customers and we are happy to report that tenacious Scotsman, Ian McLeod, was eager for his team to do even better.

Wesfarmers’ pre-Coles businesses produced some interesting numbers but before we expand on that, let’s examine just what inspired the market to lift the share price in response to the interim result.

This story continues in the Fat Prophets Members area. To get the complete report, join Fat Prophets today!

http://www.fatprophets.com.au

Article Source: WES