Wesfarmers: "great company and great management, but very overvalued"
Wesfarmers shares eyed a record high on Thursday, but it needs a big acquisition to justify its valuation, said Martin Currie's Jim Power.
Shares in Bunnings, Officeworks and Kmart operator Wesfarmers advanced 2.6% on Wednesday, after the sprawling conglomerate posted sales and profits marginally ahead of the market's expectations for the six months ending December 31.
Wesfarmers' Bunnings hardware business reported a 3.2% increase in earnings, to $1.32 billion, with sales also up 3.2%, to $10.28 billion. Officeworks and discount retailer Kmart both lifted profits and sales in the low-single digits.
Wesfarmers also has operations across lithium, pharmaceuticals, chemicals, energy and fertilisers.
The company's defensive sales and strong track record of dividend growth mean it's a popular stock with investors, who pushed its valuation to a profit multiple of 30.3 times annualised earnings per share on Thursday.
The steep valuation stood out to Martin Currie equities analyst, Jim Power, who reckons investors should give it a miss for now.
"They're a great company and great management, but very overvalued," said Power.
As part of Livewire’s Reporting Season coverage, I spoke to Power to find out more on why he likes the business, but worries about its ballooning valuation.
Wesfarmers' 1H25 results
- Revenue: $23.49 billion vs expectations of $23.46 billion
- EBIT: $2,299 million vs expectations of $2,253 million
- Net debt: $3.94 billion, versus year ago $4.26 billion
- Earnings per share: $1.294, vs expectations $1.274
- Interim dividend: 95c (vs expectations of 94.3c) vs year-ago 91c; ex 25-Feb, payable 1-Apr, 30% franked
- No financial guidance provided - On Bunnings management said, "While cost pressures are expected to persist in 2H25, Bunnings will continue to execute productivity initiatives to mitigate their impact." On Kmart management said, “Revenue and earnings growth are expected to continue in 2H25”
What was the key takeaway from this result in one sentence?
Wesfarmers is dependable and consistent, while growth is low the risk of negative surprises is also low.
Were there any surprises in this result that you think investors need to be aware of?
No surprises as a result of the quality and diversification of business and management. The largest area of possible surprise will be material M&A, but there was no movement on this front.
They're always looking [at M&A] and they need something big because they're an $87 billion company, so they've got to find a big elephant.
Would you buy, hold, or sell Wesfarmers off the back of this result?
Rating: Sell
They're a great company and great management, but very overvalued.
Are there any risks investors need to be aware of?
The high valuation placed on the stock is the biggest risk directly from the risk of a share price correction and also indirectly from the difficulty finding material merger and acquisition opportunities.
From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?
Rating: 4
Overall the ASX 200 is a four, at 8400 points. But, there's a great disparity between the haves and have-nots, so even though the overall market is at a four, there are many opportunities in non [high] growth sectors. So Ventia, Downer, Fletcher Building,Ingham are all cheap and buys.
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Tom covered markets as a reporter and commentator at the Australian Financial Review for nearly five years and worked as the Managing Editor of The Motley Fool during a period of rapid growth. Prior to that Tom worked in funds management at the Bank of New York Mellon in London and as a holder of professional investment qualification the Investment Management Certificate is eligible for membership of the CFA Society of the UK.
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Tom covered markets as a reporter and commentator at the Australian Financial Review for nearly five years and worked as the Managing Editor of The Motley Fool during a period of rapid growth. Prior to that Tom worked in funds management at the...
Tom covered markets as a reporter and commentator at the Australian Financial Review for nearly five years and worked as the Managing Editor of The Motley Fool during a period of rapid growth. Prior to that Tom worked in funds management at the...
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