3 reasons the Wesfarmers (ASX:WES) share price could be in the buy zone

Here are three reasons this leading broker believes the Wesfarmers Ltd (ASX:WES) share price could be in the buy zone right now…
The post 3 reasons the Wesfarmers (ASX:WES) share price could be in the buy zone appeared first on The Motley Fool Australia. –

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The Wesfarmers Ltd (ASX: WES) share price has been a positive performer over the last six months.

During this time the conglomerate’s shares have risen almost 11%.

Is it too late to buy Wesfarmers shares?

The good news is that it may not be too late to buy Wesfarmers shares according to one leading broker.

A note out of Goldman Sachs reveals that its analysts have upgraded the company’s shares to a buy rating and lifted its price target by 23.8% to $59.70.

This price target implies potential upside of 10.5% over the next 12 months excluding dividends. Including dividends, the broker estimates its shares to provide a potential total return of over 14%.

Why is the Goldman Sachs bullish on Wesfarmers?

Goldman Sachs made the move in response to Wesfarmers’ half year result last week.

It was impressed with the company’s performance and named three reasons why it has upgraded its shares. They are as follows:

Favourable housing cycle

“Earnings momentum in Bunnings (c. 65.2% of FY22 EBIT and 75.8% of SOTP EV) benefits from a strong property cycle due to its exposure to DIY and Trade home improvement categories. Housing indicators appear to be more positive in the recent updates and industry expectations remain positive for the short term. We believe this is likely to impact Bunnings positively while it cycles through the strong COVID driven sales in the past year, resulting in strong short- /medium-term earnings momentum.”

Turning the corner in Department stores

“The department stores division (19.8% of EBIT and 9.4% of SOTP EV) is currently undergoing a restructuring. While the viability of the Target business model in the longer term was a key question previously, we believe that the pandemic driven demand has resulted in the Target offer being refined to meet consumer demand, with e-commerce playing a key role within the business. We no longer expect this business to be an earnings drag to WES but that Target will remain a low growth, low margin sustainable engine complementing the successful Kmart business model.”

Potential for M&A or capital management

“Wesfarmers maintains a very strong balance sheet (Net cash position of A$870mn in Dec 2020). In our estimates, the group’s leverage position offers headroom of >A$8bn for capital management or M&A before it would risk breaching the range for the A-/A3 credit rating that the group maintains. While we believe management is unlikely to return capital while the macro uncertainties remain, we note WES holds strong firepower to take advantage of any long term return accretive M&A opportunities in the short term and offers potential for capital management in the medium term.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post 3 reasons the Wesfarmers (ASX:WES) share price could be in the buy zone appeared first on The Motley Fool Australia.

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