The shares of Wesfarmers Ltd (ASX: WES) will be on watch today after the company provided a positive update on its resources business.
This time last year the much-maligned business made its first loss in 16 years amid weak commodity prices and a stronger Australian dollar. This led many to call for Wesfarmers to offload the business, but it's lucky they didn't.
This morning management revealed that in the first-half of FY 2017 its resources business is expected to deliver earnings before interest and tax of between $135 million and $140 million.
Not only is this a fantastic turnaround from the $118 million half-year loss it made in FY 2016, but it smashes the previous guidance it provided in October. At that point management expected the business to break-even for the half.
According to the release the impressive performance was the result of strong production in the second quarter thanks largely to a new mine plan and the opportunistic use of its contract fleet to increase volumes and take advantage of high coal prices.
Coal prices surged last year when the Chinese government restricted the number of days coal mines could operate to 276 days per year.
Wesfarmers wasn't the only winner from the move. Whitehaven Coal Ltd (ASX: WHC) shares have now risen an incredible 485% since this time last year.
Is it time to invest in Wesfarmers?
Whilst this is undoubtedly a strong result from its resources business, I wouldn't be in a rush to invest in Wesfarmers.
The coal price has been showing signs of weakness in recent weeks and I expect it could start to drift lower in the next few months to put pressure on its second half result.
An early warning sign could be the fact that miners like Whitehaven have been offloading coal well below the contract price according to the AFR. In the December quarter, Whitehaven received an average price of US$104 per tonne for semi-soft coking coal, compared to the contract price which was set at US$130 per tonne for the quarter.
Furthermore, with the supermarket price war with Woolworths Limited (ASX: WOW) and ALDI in full swing and Target still struggling, I'm not hugely confident the rest of its business will deliver an improved result that justifies an investment today.
