Analysts have taken the knife to Wesfarmers Ltd (ASX: WES), slashing the stock to a "sell" recommendation.
According to the Australian Financial Review, in response to the blue-chip's full year results last week a number of analysts have downgraded their outlook for Wesfarmers' stock. Despite the $52 billion conglomerate announcing a capital return to shareholders, thanks to the cashed-up balance sheet, analysts have focussed on the tough outlook for most of the group's non-retail divisions.
Downgrades flow
It is these non-retail businesses plus Target which appear to be concerning analysts at a number of major broking houses: Deutsche Bank downgraded from a 'hold' to 'sell'; Merrill Lynch adjusted its view to 'underperform'; Macquarie downgraded to 'underperform'; and Credit Suisse dropped its recommendation from 'neutral' to 'underperform'.
What should shareholders do?
Wesfarmers owns a suite of leading assets including retailers Coles, Bunnings, Kmart, Target and Officeworks, as well as a host of non-retail businesses including coal mining operations, chemical suppliers and industrial and safety operations.
The full year result last week saw revenues and profits increase by 4.2% and 6.1% respectively and investors initially cheered, sending the stock price up to a new 52-week high of $45.88. By the end of the week however the stock had recorded a rise of 2.6% for the five trading days and closed at $44.70.
The concern expressed by most analysts was that the turnaround in Coles may be slowing, Target remains under pressure and the non-retail businesses may decline further in FY 2015 – all these headwinds make the current pricing of the stock hard to justify.
In the past year Wesfarmers' share price has moved almost in lock-step with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) while over the past decade it has underperformed. If an investor's aim is to own a portfolio of stocks with the potential to outperform the index then Wesfarmers may not be the best holding for the portfolio. If however the aim is to hold a portfolio of blue-chips that will provide 'market-like' returns then Wesfarmers may still suit them.
