The Wesfarmers Ltd (ASX:WES) share price could be great value according to one leading broker. Here’s what you need to know…
The post Here’s why the Wesfarmers (ASX:WES) share price could be great value appeared first on The Motley Fool Australia. –
The Wesfarmers Ltd (ASX: WES) share price has been a market beater over the last 12 months.
Since this time last year, the conglomerate’s shares have rallied an impressive 28% higher.
Can the Wesfarmers share price go even higher?
Don’t worry if you missed out on the strong gain by the Wesfarmers share price over the last 12 months because one leading broker believes it can still go higher.
According to a recent note out of Goldman Sachs, its analysts have reaffirmed their buy rating and $59.70 price target.
Based on the latest Wesfarmers share price of $49.99, this price target implies potential upside of over 19%.
In addition to this, Goldman is forecasting a $1.88 per share fully franked dividend in FY 2021. This represents an attractive yield of 3.75% and stretches its total potential return to approximately 23%.
What does Goldman like about Wesfarmers?
There are three key reasons the broker is bullish and believes the Wesfarmers share price can go higher.
These are its exposure to the housing market, a turnaround in the department store segment, and potential mergers and acquisitions (M&A) or capital management.
Housing market exposure
In respect to the housing market, Goldman said:
“Earnings momentum in Bunnings 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.”
Department store turnaround
This growth is expected to be complemented by a turnaround in its department stores division. It said:
“The department stores division 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 believe that Target will remain a low growth, low margin sustainable engine complementing the successful Kmart business model.”
M&A or capital management opportunities
Finally, with Wesfarmers sitting on a mountain of cash, Goldman suspects that M&A or capital management initiatives might not be far away. The broker explained:
“Wesfarmers maintains a very strong balance sheet (Net cash position of A$870mn as of 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 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 Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.