The Wesfarmers Ltd (ASX: WES) share price has dropped around 11% after reporting. It has just hit a 52-week low. Wesfarmers hasn't been this low since late 2020. Is the smart money now jumping on the diversified business?
Considering the Wesfarmers market capitalisation is in the tens of billions of dollars, an 11% drop represents a large fall in dollar terms.
What did investors see in the FY22 half-year result?
Total revenue fell 0.1% to $17.76 billion, whilst net profit after tax (NPAT) dropped 12.7% to $1.2 billion.
Management said that the first half of FY22 was the most disruptive for its businesses since the start of COVID-19, with store closures in NSW, Victoria and New Zealand.
The biggest profit generator for Wesfarmers is Bunnings, which the company said generated a pleasing result. However, this represented a 1.2% earnings before tax (EBT) decline to $1.26 billion. This division can have a big impact on the Wesfarmers share price.
Kmart Group saw a 63.4% decline of EBT to $178 million and an 18% drop of EBT for Officeworks to $82 million.
Management blamed store closures for the Kmart Group difficulties – 25% of store trading days were lost – as well higher costs and lower stock availability. It also paid employees when there was no meaningful work during lockdowns and when they were required to isolate. But Catch transaction value increased 1% year on year and 97.5% over two years, but earnings were lower as it invested for long-term growth.
Officeworks saw declining sales in higher-margin office supplies and print and copy categories, as well as higher costs for elevated levels of online orders.
The Wesfarmers chemicals, energy and fertilisers (WesCEF) EBT jumped 36.3% to $218 million.
Wesfarmers decided to cut the dividend by 9.1% to $0.80 per share.
Management said that overall economic conditions in Australia remain favourable, but it's managing increasing inflation and will leverage its scale to mitigate the impact of rising costs. The retail businesses will increase their focus on price leadership. It wants to keep providing customers with great value in this rising cost-of-living environment.
Retail conditions were subdued in January due to COVID, but trading momentum has improved in recent weeks. It's still seeing extra costs and stock availability impacts because of supply chain disruptions. These impacts are expected to continue in the second half.
However, the company continues to invest in its data and digital ecosystem to provide customers with a more personalised digital experience.
The acquisition of Australian Pharmaceutical Industries Ltd (ASX: API) is expected near the end of the 2022 calendar year first quarter.
Is the Wesfarmers share price an opportunity?
Most brokers don't think so.
UBS recognised that COVID impacts caused the difficulties in the first half, but ongoing impacts into the second half were discouraging for the broker. UBS is 'neutral' on the business. However, the UBS price target is $54 – 10% higher than right now.
Plenty of other analysts also rate Wesfarmers as neutral/a hold.
But, there is one broker that is positive on the Wesfarmers share price. Morgans rates it as a buy, with a price target of $58.50, implying a potential upside of around 20% over the next 12 months. This broker believes that Wesfarmers will see a good recovery once the current impacts subside.
On Morgans' numbers, Wesfarmers is priced at 25x FY22's estimated earnings and 22x FY23's estimated earnings.
