Down 20% in 2022, is the Wesfarmers share price a clear opportunity?

We check whether shares in the retail conglomerate could be a buying opportunity after a difficult start to the year.

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Key points

  • The Wesfarmers share price has dropped almost 20% this year
  • Analysts weren’t impressed with the company's FY22 half-year result
  • It’s expected that the company can recover once COVID-19 impacts dissipate

The Wesfarmers Ltd (ASX: WES) share price has dropped by almost 20% since the start of the year. It begs the question: could the ASX blue chip share now be a buying opportunity?

A business isn’t necessarily a buy just because it drops in value, but it can help improve the margin of safety. In the investment world, that’s the concept of how much cheaper an investment is compared to what an investor believes the intrinsic/underlying value is. The idea is that a larger margin of safety can reduce the likelihood of a loss with the investment.

Analysts weren’t exactly excited by the company’s FY22 half-year result, which wasn’t as pleasing as expected.

For example, UBS noted that COVID-19 hurt the company with elevated costs and multiple store closures. The supply chain was also severely disrupted and this continues.

What did it report in February?

Excluding “significant items”, Wesfarmers reported that revenue fell 0.1% to $17.76 billion, earnings before interest and tax (EBIT) dropped 12.3% to $1.9 billion, and the net profit after tax (NPAT) declined 14.2% to $1.2 billion. Some investors use profit as the metric to value the Wesfarmers share price.

The first half was “the most disrupted period” of COVID-19 for Wesfarmers.

The company continued to provide paid pandemic leave to team members, including all permanent and many casual employee through periods of prolonged lockdown. This was even when there was no meaningful work for them and when they were required to isolate. This totalled $37 million in the half.

The company said that sales momentum improved as lockdowns and other restrictions were eased, though the Omicron COVID-19 variant then had a negative impact on foot traffic.

Wesfarmers also pointed out that ongoing constraints in global supply chains led to delays and additional costs, including higher container shipping expenses during the half. Domestic supply chains were also impacted.

There was a mixed performance in terms of the underlying earnings before tax (EBT) within different divisions. Bunnings EBT was almost flat, down 1.2% to $1.26 billion. Kmart Group (which includes Kmart, Target and Catch) saw EBT sink 63.4% to $178 million, Officeworks EBT fell 18% to $82 million, Wesfarmers chemicals, energy and fertilisers (WesCEF) EBT jumped 36.3% to $218 million, and the industrial and safety EBT rose 10.8% to $41 million.

Is the Wesfarmers share price an opportunity?

Wesfarmers thinks the overall economic conditions in Australia remain favourable, supported by “strong” employment and high levels of accumulated household savings. It’s actively managing increasing inflation pressures and says it will “leverage its scale to mitigate the impact of rising costs”. It’s also going to focus on price leadership for customers.

The company said that retail trading conditions were subdued in January but trading momentum improved in February.

Wesfarmers recently completed the acquisition of Australian Pharmaceutical Industries. This will be the foundation of a new health division, which will also look at the wellbeing and beauty sectors.

The broker Morgans thinks that the Wesfarmers share price is an opportunity, rating it as a buy with a price target of $58.50. Both the broker and management think the company will do well once COVID-19 impacts subside.

On Morgans’ numbers, Wesfarmers shares are valued at 22x FY23’s estimated earnings with a projected FY23 grossed-up dividend yield of 5.3%.

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 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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