Wesfarmers Ltd (ASX: WES) has landed itself in a spot of bother lately, and its share price has taken a tumble.
As shown above, the Wesfarmers share price is down 6% in the last four days. That compares to a 0.61% increase in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
No doubt, some shareholders will be left wondering if now is a good time to sell out.
Is Wesfarmers Ltd a sell?
Following the announcement of impairment charges (mostly due to goodwill for the Target business), amounting to as much as $2.3 billion, announced earlier in the week, a number of prominent analysts have moved to downgrade their intrinsic value estimates of Wesfarmers' shares.
According to Dow Jones Newswires, Morgan Stanley and Macquarie analysts cut their price targets to $39 and $42.61, respectively. Wesfarmers last traded at $40.40.
What does that mean?
It's easy to see media headlines declaring '$2.3 billion in impairment charges' and Wesfarmers' subsequent share price falls as a cause for concern.
However, taking the time to understand the company's announcement is vital to making a prudent investment decision. Indeed, as can be seen from the modest analyst downgrades, the charges to be incurred aren't as meaningful as the financial media would have you believe.
Foolish takeaway
Goodwill is an accounting item which arises from acquisitions. Basically, it is the difference between the purchase price of an acquisition and its assets.
Wesfarmers' decision to write-down or impair the goodwill associated with its Target business was a long time in the making. While — retrospectively — we can say Target was a terrible investment, Wesfarmers also bought Coles, a business which has more than earned its stripes under the Wesfarmers banner. Meanwhile, the Curragh business is in a very tough industry, so its write-downs should not have caught analysts by surprise.
In my opinion, the decision to incur these charges does not make Wesfarmers a sell, nor does the recent share price drop make it a buy.
