Wesfarmers’ FY23 result ticks all the boxes - but is this fundie buying?

Australia’s best-known conglomerate really had no business turning in such a stellar set of results on Friday. 

Firstly, it’s heavily exposed to the consumer discretionary sector – a notorious laggard during troubled economic times. And it’s such a diverse organisation, with one side of the company flogging cheap apparel to the masses, while the other prepares to sell its first lithium in the first half of FY24. But it delivered a comprehensive result on Friday, beating analyst expectations on NPAT, revenue, and EBIT while also upping its FY dividend by 6%.

For MPC Markets' Mark Gardner, the only surprise from the result was its uniformity across such a mixed bag of business units. He minces no words in his assessment: “A solid result from a solid company.”

“It’s an impressive result for such a diversified business, which really goes to show the quality of its management,” Gardner says.

Mind you, this isn’t a “humble brag” from someone who’s long the stock in question. WES isn’t even in the MPC Markets portfolio (nor are any consumer discretionary stocks...yet).

In the following Q&A, Gardner provides his insights on the result, including whether he regards the company as a Buy, Hold or Sell.

Note: This interview took place on Friday 25 August 2023.

Wesfarmers full-year key results

• Net profit after tax: $2.46 billion +4.8%
• Group EBIT: $3.86 billion +6.3%
• Total revenue: $43.55 billion +18.2% ($38.23 billion +7.4% excluding Wesfarmers Health)
• Earnings per share (CPS): 217.8 +207.8
• Dividend (fully-franked): $1.91 +6%

In one sentence, what’s your key takeaway from this result?

A solid result from a solid company. Management has yet again shown they’re a cut above.

Was the market’s reaction to this result, with the share price up about 3% on the morning, an overreaction, an under-reaction or appropriate?

On a day when the market was a sea of red, I think the market reaction was very positive and I think that’s appropriate. Wesfarmers has managed to post solid results across all business segments, which is impressive for such a diversified business. It really goes to show the quality of its management.

It was a little unfortunate that they had to report on a day with such a weak lead-in from offshore when the NASDAQ turned around 2% amid broader offshore market weakness. If not for that, the result could have been 2% or 3% higher.

Were there any major surprises in this result that you think investors should be aware of?

Not really. The only surprise for me was just how uniformly solid the result was.

It’s such a diversified business that to achieve such uniformly great results across every business segment is super impressive.

For example, they’ve had the recent acquisition of API [Australian Pharmaceutical Industries] which was bolted on recently; they’ve got a lithium mine; retailers in hardware, and then Kmart, Target and the like.

The businesses aren’t like for like but they’ve applied their management and business model across each of those and achieved a really good result. There are plenty of companies out there that haven’t got it right this earnings season and yet only have one thing to concentrate on, let alone six or seven different things.

The way they’re able to just bolt on businesses, apply their methodology and then improve them. In terms of long-term growth, if they have an acquisition, it’s almost always a positive thing.

They’ve managed through COVID and the lockdown that really hurt Kmart and Target, but their cash flow is now above $3.6 billion again. They just always seem to navigate the storm, no matter what the storm is.

Wesfarmers is increasingly becoming far less cyclical and far more of an all-weather stock.

Would you buy, hold or sell Wesfarmers on the back of these results?

Rating: HOLD

We’re pretty reticent to add consumer discretionary to our portfolio, it’s not a sector we hold at all currently. But it’s our preferred company in the sector.

On the back of this result, It’s definitely a hold but given our outlook, we’d be looking to add to that position on any sort of weakness. It’d be one that we’re very primed to try and buy the dip on and hold as a long-term pick.

It won’t be immune to the broader market weakness we’re expecting in the back half of the year but…it’s the first consumer discretionary stock we’ll be adding to the portfolio on any weakness.

If you’ve got it, hold it. If you haven’t, I’d have an itchy trigger finger to buy it.

What’s your outlook on Wesfarmers and its sector for the year ahead? Are there any risks to this company and its sector that investors should be aware of?

We think interest rates will be higher for longer, with the savings rate (of consumers) running out. But in a weird way, that might actually benefit Wesfarmers because of the budget brands they own. 

We’ll probably see a lot of switching from premium brands into discount brands like Kmart, Target, and Bunnings, which seems to be bulletproof.

I don’t think they’ll get the pullback of the likes of Harvey Norman (ASX: HVN) or Adairs (ASX: ADH), with those big ticket items where people can delay those purchases until they solidify their household budgets.

The retail businesses WES owns are at that discount end and are generally [where people make] small purchases, so should weather the storm better than most of the sector. And they’ve got other interests too, including the Bunnings real estate, the lithium interests coming on board [with production] in CY24, so I think these guys will be the pick of the litter.

In terms of risks, any potential write-down of the BWP Trust assets will hurt the share price, as will any broader weakness in consumer discretionary. No stock is immune to broader market weakness.

And if we get a soft-landing scenario [for the economy] and this is as bad as it gets, we would be at full allocation in Wesfarmers. Our only hesitancy is the higher interest rates for longer and the downturn in the economy, where consumer discretionary and real estate are two of the worst-performing sectors.

The risk is that it gets swept up in that broad negativity but I think that then just provides a buying opportunity.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX right now? Are you excited or are you cautious on the market in general?

Rating: 3.5 - 4

We’re very cautious and are probably the most defensive we’ve been in a long time. We’ve got a heavy allocation to fixed income and are currently getting paid relatively handsomely to sit on the sidelines. For example, in banking hybrids, where we’re getting over 7% without taking much risk.

In the likes of companies like COL, WOW, TLS, a lot of those defensive names that people used to own amid higher interest rate environments, the yields just aren’t good enough any longer for that. Average P/Es in these names during the 2000s was under 20 but they’re now averaging over 27.

If there’s any economic slowdown, we’ll embrace the downside and go shopping for stocks to hold for the long term. It could be one of the next opportunities over the next five years to get involved in stocks at cheap prices.