Thesis

I am very bullish (and very long) WES. I believe I will compound at 14-17% per annum in WES (dividend + franking credits included).

Wesfarmers' retail business will not succumb to Amazon's online model. The reasons are:

1. If you look at Home Depot in the USA, that stock has appreciated 4x. It is due to the fact that when it comes to home repairs or home improvement, people don't want to order online and wait for their item to arrive on a weekday. People just want the darn product, fix their problem/home, and therefore head to Home Depot.

2. Kmart and Target is the space I want to invest in. With the wealth gap only widening, you need to either play at the very low end, or the very high end (think Hermes, Louis Vuitton). You do not want to be squeezed in the middle. Again, if you look in the USA, low cost stores have flourished despite Amazon having a powerful presence. Why? It's because the lower demographic don't shop online and scour the internet for the cheapest price. They just head to the Target/Kmart equivalent.

3. Wesfarmers are now moving into other product categories which are less impacted by online shopping e.g. tiles, pharmaceuticals.

4. I think Flybuys is worth quite a lot and is not priced in. There is a lot one could write about this business, but all you need to think about is just how valuable frequent flyer/loyalty programs are. Data, analytics, points programs (I don't want to call it loyalty programs), and aggregation is enormously powerful.

5. Everyone knows that the balance sheet is solid. However, what this means is Wesfarmers can deploy cash to buy growth. Savvy growth in a space that is not threatened by Amazon, that ties into Flybuys, and serves the right demographic = more profits, more acquisitions, and more dividends.

It's a virtuous cycle upwards.

In relation to the other businesses:

6. I'll take a bit of diversification in various industrials.

Shareholder friendliness:

7. Some companies are not run for shareholders. They are run for employees or other stakeholders. On Wesfarmers website, it is loud and clear that "the focus of our diverse operations is to provide a satisfactory return to our shareholders".

Needless to say, this is key to achieving a solid result as an equity holder.

There is so much one could write about WES, but I think the company has business units that earn high returns on capital, can deploy cash to buy businesses that can earn >11%, and the 4-5% dividend yield will be complemented by a 10-11% rise in the share price over the long run.