Is the Wesfarmers (ASX:WES) share price great value or overvalued?

Could the Wesfarmers share price be good value?

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The Wesfarmers Ltd (ASX: WES) share price is an interesting proposition after rising 9% over the last month and 25% in the past year.

Wesfarmers is the parent company of several different business including Bunnings, Kmart, Officeworks and Catch.

Analyst valuation on the Wesfarmers share price

Share prices are regularly changing. Sometimes a share price can significantly change in a few weeks.

If a business goes up or down significantly, it can change analyst thoughts about whether it’s good value or not.

The broker Citi thinks that Wesfarmers shares have risen too far and that it is overpriced, which is why it currently has a ‘sell’ rating.

In terms of the price target – which is where the broker thinks the Wesfarmers share price will end up in 12 months – Citi has a $50 price target on Wesfarmers. That suggests that Wesfarmers shares could fall by the mid-teens in the next year.

Based on Citi’s estimates, the Wesfarmers share price is priced at 28x FY22’s estimated earnings.

However, the broker does think that the acquisition of Australian Pharmaceutical Industries Ltd (ASX: API) can add value.

API takeover

Earlier in November 2021, Wesfarmers and API entered into a scheme implementation deed where Wesfarmers will buy all of the API shares at a share price of $1.55 per share. Wesfarmers currently owns 19.3% of the business already after buying 95.1 million shares last month.

API’s board has unanimously recommended the deal to shareholders. The deal still needs to go through the process of shareholder approval, ACCC approval and so on.

Wesfarmers’ managing director Rob Scott explained that the acquisition will provide an attractive opportunity to enter the growing health, wellbeing and beauty sector. Mr Scott said:

Wesfarmers continues to see opportunities to invest in and strengthen the competitive position of API and its community pharmacy partners by expanding ranges, improving supply chain capabilities and enhancing the online experience for customers.

In addition to our discussions with API management, we have engaged with industry stakeholders during due diligence. As we have previously stated, Wesfarmers supports the community pharmacy model, including the pharmacy ownership and location rules. Wesfarmers recognises the importance of strong relationships with our trading partners and we look forward to working closely with API’s pharmacy partners, supplies and other industry stakeholders.

Latest trading update

The Wesfarmers share price can be influenced by the sales or profit numbers that it is reporting.

Wesfarmers recently said at its AGM that since its FY21 result trading update, sales growth has improved in Bunnings, Officeworks and Catch, while results in Kmart and Target have continued to be impacted by temporary store closures. Bunnings sales to customers have been strong.

Whilst overall sales growth was being impacted by restrictions, management said the businesses are well positioned for the resumption of normal trade as restrictions ease. It has seen strong sales growth across stores in affected areas that have re-opened.

The trading performance in states and regions less impacted by restrictions has been “resilient” through FY22. Online sales have also remained “strong”, despite some capacity constraints. Over half of Officeworks’ year to date sales had been online, with online penetration in Kmart and Bunnings of 21% and 6% respectively.

Wesfarmers is also working on a market-leading data and digital ecosystem, investing in platforms for long-term growth and accelerating investment into improving the business. Management also said that it will continue to invest for the long-term into existing businesses and where it sees new and emerging opportunities.

In terms of the dividend, Citi thinks that at the current Wesfarmers share price it’s going to pay a grossed-up dividend yield of 4.6% in FY22.

Should you invest $1,000 in Wesfarmers right now?

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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.

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