Fundamental Analysis Of Wesfarmers And Woolworths Limited – Retail Industry Of Australia

Introduction to the Industry and Selected Companies

In this file, main concern has been put over the Fundamental analysis. It is quite requisite for every stockholder or investor to make a decision about long term investment in the stocks of a company. It has been observed that fundamental analysis method is crucial for the investors as it offers the entire ups and downs information of the company of last few years through analyzing the worth of the company. While conducting the study of fundamental analysis, it has been observed that various information such as annual report, financial statement, new changes in the company etc. For conducting this report, retail industry of Australia has been taken into the context and two companies of retial industry has also been taken which are Wesfarmers and Woolworths limited for performing this study n a well manner (trading economy, 2017).

Retail industry of Australian has been analyzed and it has been observed that this industry of Australia offers the higher GDP of the country. It has been observed that due to the global financial crisis the Australian retail industry has also been affected as well as it hampered the performance of the entire companies of the industry. Still the Australian retail company is performing very well and thus the companies of the industry had affected the less in comparison of other industry’s firms. Further, Wesfarmers and Woolworths limited has been observed as two of the biggest Australia retailing companies in the market of Australian. Hence, for performing this report, these 2 companies have been taken into the context as the growth of the industry hugely depends over these two companies.

Woolworth’s limited company is recognized as one of biggest Australian retailing companies. Woolworth limited is operating its business from last 2 decades in the Australian market. In 1997, it has registered itself in the Australian stock exchange to trade the business of stocks. The head office of the company is situated at South Africa. This company has operated its business functions into numerous sections such as Woolworths logistic segment for handling the transportation, Woolworths clothing segment for producing and selling the home ware items, beauty products and clothing, Woolworth food consists the food outlets, Woolworths financial services department offers various financial services to the clients, further, various other departments are also there such as Country road group, witchery group, David Jones etc. Currently, the company is operating its business in approx 14 companies with the 43000 man power and it is operating its business through 1300 outlets. Australian Retail Company and the annual report of the company depict that almost 40% of total revenue is earned by the company from Australian market only (Morningstar, 2017).

Review of Macro and Micro Factors

Wesfarmers limited company is recognized as one of biggest Australian retailing companies. Wesfarmers limited is operating its business from last 10 decades in the Australian market. In 1914, this company has come into existence and it has registered itself in the Australian stock exchange to trade the business of stocks. The head office of the company is situated at Perth in Australia. This company has operated its business functions into numerous sections such as gas processing,  retail industry, safety product distribution industry, distribution industry, coal mining industry, production industry and many, chemical industry, fertilizers manufacturing industry and lastly investment businesses in various countries like UK, Australia, new Zealand and global. Presently, company has diversified its business into various markets and industries to manage the performance and profitability of the company (Nelson et al, 2012).

Fundamental analysis is one of the methods to manage the portfolio or stock of the company. Top down analysis and bottom up analysis are the two methods of technical analysis. In fundamental analysis, external factor and internal factor of a company has been analyzed to monitor the performance and positioning of the company and the industry. Top down analysis express its concern about various market changes and the economical factor of the country. Basically, this analysis has been performed over the Australian retail industry of to analyze the various macro economical aspect of the industry. It has been found through the study that various issues are faced by the investors while making a decision about the investment in a stock so various methods are available for them to make a better decision. Top down analysis is one of them.  For performing the study over the top down analysis of Australian retail industry various macro economical factors have been analyzed such as, inflation rate of the country, GDP, interest rate etc (Krnatz, 2016). Through the study, it has been found that in Australian retail market, various macro economical factor are there to influence the operation of the industry.

Potential of the investors have been analyzed for conducting this report further. GDP has been taken as the main indicator that helps the investors and analyst in evaluating the health of economy, political condition, environmental factor and conditions of the country. The global financial crisis has also been studied and found that due to that crisis, Australian retail industry has also faced issued and because of that issues, the return of the company to their investors have been lowered (Morote, García-Ybarra & Castillo, 2013). Still, the return offered by the Australian retail industry is far better than other industries and other countries.

Summary of Findings and Recommendations

(Yahoo finance, 2017)

Through the above chart, it has been found that the Australia’s GDP per capital is USD 1.205 trillion whereas the GDP of other companies such as India and Canada are quite higher. But changes into last few years have been studied and found that the GDP of the country is enhancing rapidly. Additionally, it has also been observed that the political sustainability and exchange rate risk of Australian market is rather positive in contrast of other states like UK and therefore it becomes simple for the stockholders to invest into this state and the Australian retail industry is also adopting many strategies to manage the risk (Zaki et al, 2014).

(Analysis – Total retail, 2017)

The Australian retail industry has been analyzed and it has been found that the performance of the retail industry in the Australia is enhancing its performance from last few years. The retail industry of Australia is depicting an average rate of 8% of growth every year and the growth rate of retail industry is quite higher in Australian market. Further, various techniques and policies of the Australian market have been analyzed and it has been found that the political changes are quite constant and thus they are not impacting over the performance and profitability of the company. More, the fiscal policy of Australian market has been analyzed and found that diverse changes have taken places into the Australian fiscal plan which have impacted over the Australian retail industry and due to it, the foreign direct investment of the company has also been enhanced (Lou et al, 2012). GDP chart of the Australian market depict that the Australian GDP has been lowered from last 2 years still the Australian market’s current condition depicts about an upward slope of GDP that express about the investment which would be higher in the Australian market as Australian market’s return capacity would be enhanced due to it. The Australian market’s inflation rate has also been investigated and it has been found that the country’s inflation rate has been improved by 1.95% currently from last year.

The Australian retail industry and the firms under the Australian retail industry have been evaluated and it has been found that various positive changes have been put into the Australian retail industry. Woolworths and Wesfarmers limited which are the top companies of Australian retail market have been investigated and it has been found that the return to the shareholders are enhancing in both the companies (Luo et al, 2014). And the operations and the policies and strategies of the company has also been analyzed and it has been found that both the companies are fairly competitive and it aids the industry to manage the return and the risk of the Australian retail industry.

The study of future projection has been done over Australian retail industry. The study over the GDP of the Australian market depicts about an upward slope which would be enjoyed by the company in near future. Additionally, the employment rate and inflation rate of the Australian market has also been forecasted and according to the forecast, a future growth is expecting in the market. Hence, through the prediction, it is said to the investors that it is a good option to invest into the retail industry as the return would be higher and the risk is quite less in future (Seng & Hancock, 2012).

Industry Viewpoint:

Australian Retail industry has been evaluated and it has been found that the total revenue of the Australian retail industry has been superior from last few years. Further, it has also been analyzed that the retail industry’s total turnover has been improved still various sub parts of the Australian retail industry are expressing a negative figures. Further, the industry’s growth has also been found and there are more chances of the industry to perform better in near future.

Industry data:

(Analysis – Retail industry, 2017)

Wesfarmers limited and Woolworths limited has been taken into the context and through this analysis, it has been evaluated that the future profitability and the performance of Wesfarmers limited and Woolworths limited are quite striking. Both companies have adopted various new strategies to handle the profitability and company’s performance. The BOD of Wesfarmers limited and Woolworths limited have announced about the new planning for managing the functioning of the company and comeback into the market with strong preparation.

The intrinsic value of Wesfarmers limited and Woolworths limited has been evaluated according to the two models (Piotroski & So, 2012) which are P/E multiple model as well as cash flow technique.

Below are the Wesfarmers’s stock price movement in last 5 years.

(Yahoo finance, 2017)

The above graph depict that the stock price of the company has been fluctuated various times in last 5 years.  

Below are the Woolworths’s stock price movement in last 5 years.

(Yahoo finance, 2017)

The above details depict that the stock price of the company has been fluctuated less in last 5 years.  

P/E model:

Further, for analyzing the intrinsic value of the company, PE model has been taken into the context. Wesfarmers limited and Woolworths limited’s performance has been indicated through considering the Australian retail industry as well. In this model, Wesfarmers and Woolworths’s EPS and PE have been calculated and after that by multiplying the P/E and EPS, price of stock has been calculated.  Through this report, it has been investigated that whether the stocks are undervalued or overvalued shares. 

Intrinsic Value: PE Multiple approach
A. Industry PE	25.25
B. EPS	0. 52
C. Price per share	13.13
D. Actual Price	42.52
E.  Over valued	29.39

(Morningstar, 2017)

While evaluating the share price of the company, it has been found that the Earnings per share of the company are 0.52 whereas the PE ratio of the industry is quite higher. It has been analyzed that the stock price of the Wesfarmers is highly overvalued. Thus it could be said that the industry is not performing according to the rules and regulations of the industry.

Intrinsic Value: PE Multiple approach
A. Industry PE	25.25
B. EPS	0.78
C. Price per share	19.695
D. Actual Price	17.08
E.  Under valued	2.615

While evaluating the share price of the company, it has been found that the Earnings per share of the company are 0.78 whereas the PE ratio of the industry is quite lesser. It has been analyzed that the stock price of the Woolworths is highly undervalued. Thus it could be said that the industry is not performing according to the rules and regulations of the industry (Hajkowicz, Cook & Littleboy, 2012)

Thus through this report, it could be depicted that the retail industry of Australia’s performance is quite attractive and this investment would provide high return to its investors. 

Fundamental analysis is one of the methods to manage the portfolio or stock of the company. Top down analysis and bottom up analysis are the two methods of technical analysis. In fundamental analysis, external factor and internal factor of a company has been analyzed to monitor the performance and positioning of the company and the industry. Bottom up analysis express its concern about stock price changes and the changes into the company’s business functioning. Basically, this analysis has been performed over the Australian retail industry of to analyze the various micro economical aspect of the firm. It has been found through the study that various issues are faced by the investors while making a decision about the investment in a stock so various methods are available for them to make a better decision. Bottom up analysis is one of them.  For performing the study over the bottom up analysis of Australian retail industry various micro economical factors have been analyzed such as, ratio analysis, DU Pont analysis etc (Krnatz, 2016). Through the study, it has been found that in Australian retail market, various micro economical factors are there to influence the operation of the industry (Zhang et al, 2013).

Potential of the investors have been analyzed for conducting this report further. Ratio analysis and DU Pont analysis have been taken as the main indicator that helps the investors and analyst in evaluating the performance of the company, return to the investors, price fluctuations etc. The global financial crisis has also been studied and found that due to that crisis, Australian retail industry has also faced issued and because of that issues, the stock price of the company has been lowered (Morote, García-Ybarra & Castillo, 2013). Still, the fluctuation in the stock price of Australian retail firms is quite lesser.  

Firstly, financial data of the company has been analyzed to perform the bottom up analysis of the company:

Wesfarmers:

For the bottom up analysis, 2 year’s financial data of the Wesfarmers has been evaluated to recognize the company’s position and performance (Parker & Vannest, 2012). It has been found that the performance and the position of the company have been enhanced from 2016 in 2017.

Financial Data of Wesfarmers company
Particulars	Amount	Amount
	AUD$ ‘000	AUD$ ‘000
Total Revenue	68,015	65,512
COGS	46,359	45,525
Operating Profit/(Loss)	21656.0	19987.0
EBIT	4138.0	1038.0
Finance cost	264.0	308.0
Net profit	2873	407
Current Assets	9667	9684
Quick Assets	3137	3424
Inventory	6530	6260
Average inventory	6395.0
Trade receivables/Debtors	1633.0	1628.0
Average Debtors	1630.5
Total Assets	40115	40783
Average assets	40449	60604.5
Dividend Paid	13770	11340
Current Liabilities	10417.0	10424.0
Trade Payables/Creditors	6615	6491
Average creditors	6553
Total Liabilities	16174	17834
Capital Employed	29698.0	30359.0
Long term loans	5,757	7,410
Shareholders’ Equity	23941	22949
Dividend per Share (DPS)	2.56	733
Earnings per Share (EPS)	2.54	0.33
Price per Share	10	10
Dividend per Share (DPS)	2.56	733
Earnings per Share (EPS)	2.54	0.33
Price per Share	10	10

(Morningstar, 2017)

Woolworth:

For the bottom up analysis, 2 year’s financial data of the Woolworths has been evaluated to recognize the company’s position and performance (Parker & Vannest, 2012). It has been found that the performance and the position of the company have been enhanced from 2016 in 2017.

Financial Data of Woolworths retail company
Particulars	Amount	Amount
	AUD$ ‘000	AUD$ ‘000
Total Revenue	65,004	56,504
COGS	38,618	33,356
Operating Profit/(Loss)	26386.0	23150.0
EBIT	5043.0	4140.0
Finance cost	1234.0
Net profit	4353	3120
Current Assets	10340	8281
Quick Assets	3223	2400
Inventory	7117	5881
Average inventory	6499.0
Trade receivables/Debtors	1608.0	1081.0
Average Debtors	1344.5
Total Assets	49390	41455
Average assets	45422.5
Dividend Paid	13770	11340
Current Liabilities	10978.0	9086.0
Trade Payables/Creditors	10370	8631
Average creditors	9500.5
Total Liabilities	29564	27204
Capital Employed	38412.0	32369.0
Long term loans	18,586	18,118
Shareholders’ Equity	19826	14251
Dividend per Share (DPS)	2.56	733
Earnings per Share (EPS)	2.54	0.33
Price per Share	10	10
Dividend per Share (DPS)	2.56	733
Earnings per Share (EPS)	2.54	0.33
Price per Share	10	10

(Morningstar, 2017)

Additionally, the study of ratio analysis has been performed to conduct the bottom up analysis over both the companies to investigate the micro factor of the company. It has been evaluated that this analysis over the ratios would assist the investors’ in making a better decision about the investment. For this study, numerous ratios have been evaluated like profitability ratio, liquidity ratio, efficiency ratio etc. these ratios calculation and the interruption has been given below:

Wesfarmers:

The Wesfarmers have been taken into the context, for performing the study of ratio analysis, various ratios have been calculated. Through the below calculations, it has been found that the liquidity position of Wesfarmers is constant from last year which express about a good liquid position of the company. More, profitability condition has been evaluated of the company which express a better profitable condition from 2016 in 2017 (Parker & Vannest, 2012). Lastly, company’s efficiency ratio express about the efficiency of the company and the functions of the company.

Computation of ratio analysis
Liquidity ratio	2017	2016
Current ratio	0.928002304	0.929009977
Quick ratio	0.301142363	0.328472755
Working capital	-750.0	-740.0	1%
Profitability Ratios	2017	2017
Operating Profit Margin	0.060839521	0.015844425	-0.044995095
Net Profit Margin	0.042240682	0.006212602	-0.03602808
Return on Capital Employed	0.1	0.0	-0.105145133
Return on Equity	0.120003342	0.017734978	-0.102268364
Return on Total assets	0.071619095	0.009979648
Debt equity ratio
Capital structure ratio	2017	2016
Debt- equity	0.675577461	0.777114471
Interest coverage ratio	15.67424242	3.37012987
Efficiency ratio
Efficiency ratio	2017	2016
Receivable turnover ratio	41.7141981
Creditor turnover ratio	7.074469709	6.143724696
Inventory turnover ratio	7.249257232	27.96375921
Assets turnover ratio	1.681500161	1.080975835

Woolworth:

The Woolworths have been taken into the context, for performing the study of ratio analysis, various ratios have been calculated. Through the below calculations, it has been found that the liquidity position of Wesfarmers has been better from last year due to changes in the current assets and liabilities of the company. More, profitability condition has been evaluated of the company which express a better profitable condition from 2016 in 2017 (Parker & Vannest, 2012). Lastly, company’s efficiency ratio express about the efficiency of the company and the functions of the company which are quite better.

Computation of ratio analysis
Liquidity ratio	2017	2016
Current ratio	0.941883768	0.911402157
Quick ratio	0.293587174	0.264142637
Working capital	-638.0	-805.0
Profitability Ratios	2017	2016
Operating Profit Margin	0.077579841	0.073269149
Net Profit Margin	0.06696511	0.05521733
Return on Capital Employed	0.1	0.1
Return on Equity	0.219560174	0.218932005
Return on Total assets	0.08813525	0.075262333
Debt equity ratio
Capital structure ratio	2017	2016
Debt- equity	1.491173207	1.908918672
Interest coverage ratio	4.086709887
Efficiency ratio
Efficiency ratio	2017	2016
Receivable turnover ratio	48.34808479
Creditor turnover ratio	4.064838693	1.841042058
Inventory turnover ratio	5.942144945	30.85661425
Assets turnover ratio	1.431096923

(Sarsby et al, 2014)

Lastly, a study of DU Pont analysis has been conducted over both the companies to evaluate the company’s ROE position. This DU Pont analysis has been performed to get a brief idea about the company’s condition for making a better decision about the investment in the company.

Wesfarmers:

Firstly, this study has been performed over the Wesfarmers. ROE of the company has been analyzed in this study. The ROE of the Wesfarmers is 12% in 2017.

		DuPont Model:  What If Analysis
Income Statement
Sales		$68,015
Expenses (COGS/Oper. Exp.)		$46,359	Net Profit After Taxes	$2,873
Interest Expense		$264	divided by		Net Profit	4.22%
Income Taxes		$65,658	Sales	$68,015	Margin
					multiplied by		ROA =	7.16%
Balance Sheet			Sales	$68,015
Current Assets		$9,667	divided by		T. Asset	1.6955
			Total Assets	$40,115	Turnover
Long Term Assets		$30,448							ROE
Current Liabilities		$10,417
			Total Liabilities	$16,174
Long Term Debt		$3			T. Assets	$40,115
			Stockholder Equity	$23,941
					divided by		Fin. Lev.	1.68
							Multiplier
					Equity	$23,941
Before Tax Cost of Debt	10.00%
Tax Rate	30.00%
After Tax Cost of Debt	7.00%

(Yasin, 2014)

Woolworth:

Firstly, this study has been performed over the Woolworths. ROE of the company has been analyzed in this study. The ROE of the Woolworths is 22% in 2017.

		DuPont Model:  What If Analysis
Income Statement
Sales		$65,004
Expenses (COGS/Oper. Exp.)		$38,618	Net Profit After Taxes	$4,353
Interest Expense		$1,234	divided by		Net Profit	6.70%
Income Taxes		$65,658	Sales	$65,004	Margin
					multiplied by		ROA =	8.81%
Balance Sheet			Sales	$65,004
Current Assets		$10,340	divided by		T. Asset	1.316137
			Total Assets	$49,390	Turnover
Long Term Assets		$39,050							ROE
							mult. by		22%
Current Liabilities		$10,978
			Total Liabilities	$29,564
Long Term Debt		$3			T. Assets	$49,390
			Stockholder Equity	$19,826
					divided by		Fin. Lev.	2.49
							Multiplier
					Equity	$19,826
Before Tax Cost of Debt	10.00%
Tax Rate	30.00%
After Tax Cost of Debt	7.00%

In this report, retail industry of Australia has been analyzed and further 2 firms of the same industry has been taken into the context to perform the top down and bottom up analysis. Through the top down analysis of the company, it has been found that both the companies as well as the retail industry of Australia is performing well and the companies have adopted various new strategies and policies to manage the performance of the company and the enhance the return to the shareholders. Through conducting the top down analysis over the Wesfarmers limited and Woolworths limited, it has been found that the retail industry of Australia’s performance is quite attractive and this investment would provide high return to its investors.  

Further, the bottom up analysis has also been performed over the Wesfarmers limited and Woolworths limited to analyze the micro factor of both the companies and make a better decision about the investment into the company. It has been analyzed through this report that the financial performance of both the companies has been enhanced from 2016 in 2017. Further the ratio analysis study depict that the performance of the company in terms of liquidity and profitability is quite string and the profits of the company are enhancing rapidly and lastly, the ROE of both the companies are competitive.

Thus through both the analysis over the retail industry of Australia as well as Wesfarmers limited and Woolworths limited, it could be said that the firms and industry would perform even better in near future and thus it is a good choice for the investors to invest their amount for a long term to enjoy the return of the company.

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