The Wesfarmers Ltd (ASX: WES) share price is starting the week in the red.
In afternoon trade, the conglomerate's shares are down 0.7% to $50.00.
Why is the Wesfarmers share price falling?
The weakness in the Wesfarmers share price on Monday appears to have been driven by a broker note out of Goldman Sachs this morning.
According to the note, the broker has initiated coverage on the company with a sell rating and $38.60 price target.
Based on the current Wesfarmers share price, this implies potential downside of almost 23% for investors over the next 12 months.
Goldman notes that this compares unfavourably to an average "14.5% total return for our Buy-rated stocks."
Why is Goldman bearish on Wesfarmers?
Goldman highlights that the Wesfarmers share price is trading at a premium to its average historical forward price-to-earnings ratio despite slowing growth and compressing returns. In light of this, it feels that its shares are overvalued at the current level.
In respect to its slowing growth, Goldman believes the market is too bullish on the company's outlook. It commented:
"After a period of elevated growth, we expect Bunnings revenue growth to moderate to 3.4% CAGR over 2022-2024E vs 9.3% 2019-2022E during COVID. This is due to slowing housing transactions/completions as well as rising inflation, resulting in softening of volumes as spending shifts back to staples consumption.
Similarly, we also see Kmart Group growth softening from 4.0% during COVID (2019-2022E) to 2.2% post COVID (2022-2025E) especially with recent (and potential future) China lock-downs impacting supply chains where Kmart has material sourcing exposure.
While Target is showing early signs of turnaround after the conversion of underperforming stores to Kmart, we are cautious on ramp-up post conversion to Kmart, and we think the Catch acquisition is not yet performing in line with management expectations, most notably the slow growth in active customer acquisition and ARPU dilution in 1H22."
In addition, the broker isn't confident that recent acquisitions of API, Catch, and Kidman Resources will bolster its growth and believes the company will new growth options. If not, Goldman sees a "devaluation risk on slowing growth and compressing returns."
It concludes: "We forecast that Catch will post only mid-single digit ROIC given (in our view) a lack of clear strategy and increasing competition, and that Kidman's and API's ROIC will both reach mid-teens but find it difficult to match the strength of Bunnings and Kmart in the short term. On the back of this slowing growth and with lower returns, we expect current elevated valuation multiples to compress."
