Own Wesfarmers (ASX:WES) shares? Jefferies just lowered FY22 earnings forecasts

The broker weighs in on the stock’s prospects.

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Key points

  • Wesfrarmers shares are back in the spotlight after the comany reported its first half results last week
  • Shares fell off a high of $60.02 on 4 January, dropping until today’s session
  • Jefferies notes the results were better than expected, yet lowered its FY22 earnings estimates
  • In the last 12 months, the Wesfarmers share price has gained more than 10%.

The Wesfarmers Limited (ASX: WES) share price opened in the green today and is up 0.49% to $55.65 a share at the time of writing.

Despite a rough trot these past few weeks, investors have bought in at these 3-month lows, particularly after the company’s first-half performance update.

What’s up with the Wesfarmers share price lately?

Wesfarmers outlined that overall group net profit after tax (NPAT) is forecast to come in at $1.18-$1.24 billion, a 12.5%-16.5% year on year decline.

The bulk of sales volume was derived from its Bunnings and Wesfarmers Chemicals, Energy & Fertilisers segments, offsetting weakness in the Kmart Group and Officeworks divisions.

Kmart was a particularly underwhelming component for Wesfarmers in the first half, with sales significantly impacted by COVID-19 lockdowns.

As such, management anticipates group earnings before interest and taxes (EBIT) to slide more than 50% from $487 million to between $170 million-$180 million.

Despite the downgrade, the market appeared to have priced in these risks and investors have sent the Wesfarmers share price flying off a 3-month low of $54 so far this week.

What’s Jefferies saying about Wesfarmers shares?

The team at Jefferies note that Wesfarmers’ first-half results were better than its own internal estimates for the conglomerate.

Not only that, but Wesfarmers’ forecast 1H NPAT ranges were approximately 2% higher than what Jefferies was expecting. They’re also 3% above the median consensus estimate.

Even though this is a “13% decline on the prior corresponding period”, Jeffries says, it is “in line with 1H of FY 2020 (pre-COVID)”.

The broker reckons that Wesfarmers has the capacity to continue its growth trajectory in Bunnings and Wesfarmers Chemicals, Energy & Fertilisers, offsetting the weaker Kmart and Officeworks businesses.

Even still, there are several headwinds that the market might need to price in. These are causing the broker to remain on the sidelines for now.

As such, Jefferies lowered its FY22 earnings forecasts in these divisions, whilst retaining its neutral rating on the stock and valuing the company at $55 per share.

JP Morgan, Jarden, and Morgans see things a bit differently. The brokers are each overweight on the stock, valuing it at $60.60, $59.60 and $60.80 respectively.

In the last 12 months, the Wesfarmers share price has climbed almost 11% but is bathing in a sea of red across all other time frames.

Despite these recent strengths, the Wesfarmers share price is still down more than 5% over the past month.

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

Before you consider Wesfarmers, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Wesfarmers wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

The author has no positions 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 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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