Shareholders should be pleased to see the Wesfarmers Ltd (ASX: WES) share price clawing back from morning losses even after two leading brokers downgraded the stock following the group's result announcement yesterday.
The Wesfarmers share price shed 1% in early trade but rebounded to trade 0.4% stronger at $35.11 in late morning trade.
This takes the WES share price gains to over 7% since management posted a record first half net profit of $4.5 billion and declared a $1 per share special dividend.
UBS says take profit
The strong profit was due to divestments and asset sales, including the Coles Group Ltd (ASX: COL) spin-off, but underlying net profit still increased by a respectable 10.4% to $1.1 billion.
But this isn't enough to win over UBS with the broker downgrading the stock to "sell" from "neutral".
"WES' underlying 1H19 result was not as strong as first appeared with underlying 1H19 profit ex-other up just 2% y/y and 1% ahead of UBSe," said UBS.
"Reported normalised EBIT was aided by ~$65m of one-off / non-cash items. Divisionally Bunnings was c5% below UBSe (ex-$51m lift in property profits), Kmart group EBIT declined c4% y/y and Industrials fell c3%."
UBS is also concerned that the asset sales have left Wesfarmers with too big an exposure to discretionary spending. The broker estimates that around 78% of Wesfarmers' earnings before interest and tax (EBIT) is now at the mercy of the fickle consumer.
Consumers are under pressure as the property slump is reversing the "wealth effect" and their willingness to spend could be further curtailed by record household debt levels.
What's more, the jewel in the Wesfarmers' crown, Bunnings, may disappoint as the broker thinks forecasts are too high given the housing market headwinds.
These factors are not in Wesfarmers' current share price, warned UBS which has a $32.60 price target on the stock.
Credit Suisse joins downgrade parade
The WES share price is also looking a little too rich for Credit Suisse with the broker downgrading the stock to "neutral" from "outperform".
The broker was more impressed with management's first half results and outlook and commented that most of Wesfarmers' businesses were "performing solidly", although Credit Suisse thought the share price is now looking fully valued.
Wesfarmers does have the balance sheet strength to make a meaningful acquisition even after paying the special dividend, and a takeover could be what's needed to win back these brokers.
Watch this space!
