Wesfarmers wows the analysts

This will be one of the rare beacons in this season's earnings.

Against any backdrop, this would be a solid result. Pitched against the rest on the Australian bourse, it looks even better.

There are no obvious accounting tricks and the analysts think the quality of the results are ahead of those of previous years.

Expectations for profit growth from all companies for the June 2002 results is a lift of just above 7 per cent. Wesfarmers, the 11th largest stock on our market, came in with 65 per cent.

Most of this is due to the acquisition last August of Howard Smith with its BBC hardware business and its industrial and safety businesses.

The hardware business, in particular, had a good full-year with total sales from the hardware network, including Wesfarmers' existing Bunnings business, up 14.7 per cent.

But the full benefit of synergies (more than $60 million) should come through in the current year and this is clearly what the company is relying on to offset any softness in other parts of the group.

It's fairly unusual to see a conglomerate with five major divisions (and divisions within these) to be firing across the board.

Wesfarmers seems to have achieved this in 2002, which has led some analysts to predict that it's a hard act to follow.

The reality is that one or more probably won't fire as well, but a couple, and in particular hardware, will fire even more spectacularly.

At this point the company's chief executive, Michael Chaney, predicts an acceptable increase in group earnings in 2003. Given he went to great lengths yesterday not to quantify this, we have a fuzzy picture of the company's budgets.

On the other hand, the analyst community that was looking for $480 million in 2003 before yesterday's release are now madly revising that number upwards.

Expectations of an earnings improvement beyond 16 per cent would be fairly daunting, given the global economic uncertainty facing business.

If the Australian economy starts to slacken, hardware, like every retailing sector, will feel the effects.

The other issue is the impact of drought on the fertiliser and rural services businesses. While large tracts of rural Australia are feeling the effects of drought, WA farmers appear to have been spared so far. If it spreads, the effect on Wesfarmers earnings will be more marked.

Given the success of the Howard Smith acquisition, there is pressure on Wesfarmers to repeat the experience with another. But the management has resisted the pressure to buy.

Some suggest that given the current economic uncertainty, opportunities to pick up bargain assets have improved. They suggest a company like Wesfarmers is perfectly placed to capitalise on this.

The market saw the half-full glass. Wesfarmers rose $1.05 to close at $29.14.Traditionally, Prime Minister John Howard has not been a huge supporter of big business. Traditionally, US president George Bush has.

Given the pressure Bush was facing thanks to the confidence crisis over US accounting outrages, it's probably not so surprising that he opted for a tough line on corporate re-regulation.

Howard sniffed the breeze and came up with a different view. He spoke at an Institute of Chartered Accountants/Securities Institute lunch yesterday after which those in the audience, no doubt, breathed a collective sigh of relief.

He told them of his desire to respond to this issue in a balanced and sensible fashion. He spoke of improved self regulation coupled with appropriate but not excessive levels of government involvement and intervention.

He said it was important the Government did not overreact.

He did not want a tide of fresh regulation for its own sake. He did, however, expect corporate leaders to work unceasingly to ensure that good governance practices were met at all times.

He wanted those leaders to meet the highest levels of ethical behaviour, to review governance procedures and to let customers and shareholders know they were doing this.

Good luck.