Fundamental Analysis of Woolworths and Wesfarmers Pty Ltd

Market Principal
1

Executive Summary
This report has conducted top-down and bottom-up analysis of selected two ASX listed
entities, that are, Woolworths and Wesfarmers Pty Ltd. The top-down analyses has led to the
conclusion that overall economic environment of Australia is presently in a state of expansion
supporting the growth of the retail companies. On the basis of bottom-up analysis it is
ascertained that Wesfarmers financial condition is better than Woolworths. However,
Woolworth’s financial condition is also likely to improve in the future supported by the growth
in the retail industry in the coming period of time.
2

Introduction
The present report is undertaken for carrying out fundamental analysis of the two ASX
listed companies operating in the same industry. The fundamental analysis consists of both top-
down and bottom-up analysis for identifying the macro and micro factors that can impact the
value of selected companies in the future context. The top-down analysis seeks to examine the
overall economic environment and bottom-up analysis evaluates the current financial situation of
the selected companies. The companies selected in this context are Woolworths and Wesfarmers
limited operating in the retail sector of Australia.
Top down Analysis
Overall Economic Environment Forecasted Changes in Economic Fundamentals
Top-down analysis refers to gaining an examination of the overall economic environment
in which an industry operates and then analyzing the impact of the economic trends on the
industry growth prospects. The overall analysis is meant for identifying the macro trends that are
in favor of the industry development (Samonas, 2015). The selected ASX listed companies of
Wesfarmers and Woolworths operates in the retail sector of Australia and as such this top-down
analysis has specifically examined the overall economic environment in Australia that can have
an impact on the performances of companies. The assessment of the overall economic
environment in Australia in order to evaluate the impact of the forecasted changes in economic
fundamentals on the company’s performance as follows:
Economic Analysis
Australia is recognized to be a wealthy nation and is presently in a state of major
economic expansion after recovering from the period of year 2009 of global recession. This is
largely on account of the stable political environment present within Australia that is driving the
industrial growth and development. The Reserve Bank of Australia has maintained the interest
rates at 1.5% and has decided to hold on this interest rate for a long-period of time. The interest
rate of Australia is recorded to be lowest at present as compared to the past 18 months. The
strategy is adopted by RBA for reducing uncertainty that is present in relation to the household
consumption. The decrease in the income level of consumers and rising debt levels are posing
3

uncertainty in the household consumption. As such, the RBA has decided to maintain the interest
rates and inflation rates to be lower at 2% for supporting the growth and development of the
country’s economy. The low level of interest and inflation rate will help in increasing the
spending power of consumers and thus promoting the industrial growth and development. This
will help in mitigating the high levels of household debt that is presenting a major risk against
the financial stability of the country (Australian Economy, 2018).
The Australian dollar is expected to trade at 0.76 by end of the end of this quarter as
predicted by the Trading Economics. Also, the current value of Australian dollar is expected to
suffer a declining trend after the weaker performance of its retail and international trade sector.
Also, the declining value of the country dollar is further expected to decline due to lower interest
rates and declining economic growth (Chau, 2018). However, there are also some positive
predictions regarding the growth in the Australian dollar on account of depreciation in the US.
The speculations regarding the increase in the interest rates in the US will make it a more
attractive place for investment to the foreign investors. This can reduce the money invested in
Australia and therefore causing a decrease in the demand of its local currency causing a
weakening in the value of Australian dollar (Australian Dollar Showing Long-Term Negative
Signs, 2018).
The Gross Domestic Product (GDP) is regarded as one of the major indicator for
depicting the well-being of the economy of a country. It depicts the overall market value of final
goods and service produced by a country in a given period of time. The GDP growth rate of
Australia has depicted an increase of about 2.27 per cent in comparison to the previous year in
the year 2017. Also, it has been predicted by the data provided by statistic that the GDP growth
rate of Australia is expected to increase to large amount by the end of the year 2022. The growth
rate in GDP of Australia on an average is 0.85 per cent from the year 1985-2017. The rising
demand of raw commodities from the developing countries since the year 2000 has played a vital
role in the growth of the Australian economy. The country has nearly maintained a positive
growth in the past years and has only experienced a decelerated economic growth in the year of
global financial crisis in 2009. As such, it can be said that Australia is presently in a state of
positive expansion phase as it is economy is growing on a steady growth rate of 2-3 per cent
4