The Wesfarmers Ltd (ASX: WES) share price has been punished in 2022. It's down by 22% in the calendar year to date. Ouch.
But, after this hefty fall, it could be worthwhile considering whether the business represents good value at its current level.
Compared to the S&P/ASX 200 Index (ASX: XJO), Wesfarmers has underperformed this year. The ASX 200 is down by around 9% for the year. This means that Wesfarmers shares have underperformed by more than 10%.
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Broker thoughts on the Wesfarmers share price
The broker Morgans thinks that Wesfarmers could be an opportunity for investors.
As reported by my colleague Tony Yoo, the Wesfarmers FY22 result impressed Morgans analyst Andrew Tang after the second half "bounce back". Second-half net profit rose 13.1%. Tang wrote:
We continue to view Wesfarmers as a core portfolio holding for long-term investors.
Kmart Group earnings recovered strongly in 2H22 after being heavily impacted by lockdowns in 1H22.
FY22 dividend per share of 180 cents was above our 164.8 cents per share forecast and Bloomberg consensus (169.5cps)
Group return-on-equity rose 330 basis points to 29.4%.
Morgans currently rates Wesfarmers as add, with a price target of $55.60. This implies a possible rise of around 20%.
The broker also pointed out good retail trading had continued into FY23 for Wesfarmers. The company said:
Retail trading conditions have remained robust through the first seven weeks of the 2023 financial year. Sales growth has been particularly strong in Kmart Group, with sales significantly higher on both a one year and two year basis. Bunnings also continues to see positive sales growth, on a one year and two year basis. Sales in Officeworks were in line with the prior year.
My view
I think Wesfarmers is one of the highest-quality businesses in the S&P/ASX 200 Index (ASX: XJO) and I believe the Wesfarmers share price is a buy.
Bunnings is a particularly important division for Wesfarmers. In FY22, it generated a return on capital of 77.2% and its earnings before tax (EBT) was $2.2 billion, which was 64% of Wesfarmers' total divisional EBT.
The fact that Bunnings continues to see sales growth is a positive sign. Management said that the demand outlook for Bunnings across the consumer and commercial sectors is supported by a "solid pipeline" of renovation building activity.
One of the most impressive things to me about Wesfarmers is how much it's investing for growth. It's going to keep investing in its existing operations and in the development of platforms for long-term growth in FY23, with net capital expenditure of between $1 billion to $1.25 billion.
I'm also excited by the outlook for the Wesfarmers Health division. Management said that the health division is "well-positioned" to deliver long-term growth and will continue to focus on pursuing opportunities to strengthen the competitive position of Australian Pharmaceutical Industries and its pharmacist partners.
Wesfarmers share price snapshot
While the company is down heavily in 2022, over the past month it's lost less than 2%.
