Merrill Lynch analyst David Errington is being reported widely as having downgraded Wesfarmers shares to sell, believing they will fall to around $35.55. He believes Coles’ assets have been driven into the ground and Wesfamers will struggle to turn the company around.
He either ignores or underestimates the impact that Wesfarmers, and in particular a change of culture, will have on the performance of Coles.
Myer was similarly troubled before the sale to the TPG consortium last spring. At $1.4bn, TPG were said to have paid too much. When Myer’s first set of sales numbers were released in March, Coles was wearing the egg. Myer had turned. They still have issues to address but the early signs are highly encouraging. By March, some were saying Coles had sold Myer too cheaply.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
Now we read that Myer has sold some Melbourne real estate for $605m, which means they got the company for less than $800m. On the projected earnings, they have bought a real bargain and the multiples are starting to look very tidy.
Analysts tend to take a simplistic outsider’s view of investments. An example. A few years ago, I was conducting a search for a National Loss Prevention Manager (think shoplifting etc) for Bunnings. Bunnings knew they had a huge problem, with shrinkage around twice the number expected of similar companies – at least $50m too high. I ran a job advertisement that was headlined “Bunnings want you to save them $50m”. An analyst picked up the story and wrote a client advisory dropping WES from buy to hold because he believed Bunnings had a $50m problem. He totally misinterpreted the information. What was about to occur was a $50m improvement, and most of it would be pure EBIT.
Few will argue that Coles is not a troubled company. However, Myer is an example of what can be achieved quite quickly with the right leadership, a strategy that is clearly understood by the team and strong implementation. Wesfarmers are highly likely to have a similarly rapid and positive effect on Coles – and it will be sustained.
That some analysts got Myer wrong, or misinterpreted a job ad, does not mean that Errington has erred. But I do believe he has underestimated what can be achieved when good leadership gets hold of a Coles asset. Time will tell.
Disclosure: My wife owns a small parcel of Coles shares and my company Orex still finds people for Bunnings.
Rob Lake publishes Brandish – Retail Intelligence a newsletter and website about things retail.