Wesfarmers shares have grown strongly over the last 12 months. What could happen next?
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The Wesfarmers Ltd (ASX: WES) share price has gone up around 30% over the last year. Profit has been growing. But what might happen next?
A year ago Wesfarmers was being impacted by the effects of COVID-19. That included large amounts of demand for DIY projects from Bunnings as well as items from Officeworks for learning, working and being entertained at home.
Growth continued into the first half of FY21.
FY21 half-year result refresher
In the report, Wesfarmers told investors about its underlying performance, being the continuing operations excluding significant items.
Continuing revenue rose 16.6% to $17.8 billion. The continuing earnings before interest and tax (EBIT) grew 25.2% to $2.2 billion.
Continuing net profit after tax (NPAT) rose 25.5% to $1.4 billion and continuing earnings per share (EPS) went up 25.5% to 125 cents.
The two biggest drivers of Wesfarmers earnings are Bunnings and Kmart Group. Though it does have plenty of other businesses.
In the first six months of FY21, Bunnings grew underlying earnings before tax (EBT) (excluding significant items) by 35.8% to $1.275 billion, whilst Kmart Group’s went up 42% to $487 million. Total divisional underlying EBT rose 33.4% to $2.06 billion.
Wesfarmers also showed that Bunnings’ return on capital was 76.6%.
Since the release of the HY21 result, the Wesfarmers share price has gone up 9%.
Just before the HY21 report release, the company announced the joint approval for the Mt Holland lithium project and committed initial funding.
An updated definitive feasibility study showed greater certainty regarding the project’s engineering design and capital and operating costs as well as an increase in concentrator and refinery production from 45,000 tonnes per annum to approximately 50,000 tonnes per annum of battery grade lithium hydroxide.
The updated study also included increased flexibility to provide for a second phase of the project to expand production capacity at Mt Holland and the Kwinana refinery.
What’s happening recently to the Wesfarmers share price and the profit?
Since the start of June, the stock has gone up by 6.7%.
On 3 June 2021, Wesfarmers provided a strategy briefing day.
In that update it provided a run down of the focus of each business, but it also outlined recent trading performance.
It said that the group’s retail businesses began to cycle the impacts of COVID-19 in the prior year from mid-March, leading to significant volatility in monthly sales growth results.
On a two-year basis, all of the retail businesses have continued to deliver strong sales growth.
Wesfarmers said customer demand has remained resilient, but year on year growth has generally moderated and been negative in some months for some businesses, due to elevated activity in the prior year. Online growth has also moderated as store traffic grew.
However, the industrials businesses have been seeing good operating performances and pleasing trading, according to management.
Broker Wesfarmers share price target
The price target from Morgans is $56.08 and the broker rates it as a hold.
According to Morgans, the business is valued at 28x FY21’s estimated earnings.
But Citi rates the Wesfarmers share price as a sell with a price target of $45.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.