Why did the Wesfarmers share price lag the ASX 200 in April?

Wesfarmers didn’t do as well as the ASX 200 last month.

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Key points

  • Wesfarmers shares underperformed the ASX 200 in April
  • The company recently completed the acquisition of API
  • Citi doesn't think there's much upside to the ASX 200 share right now

The Wesfarmers Ltd (ASX: WES) share price underperformed the S&P/ASX 200 Index (ASX: XJO) in April 2022.

From the closing bell on 31 March to the end of April, the Wesfarmers share price fell 1.98%. That compares to the ASX 200, which fell 0.86%. This isn’t much of an underperformance, but it’s still more than double the loss of the ASX 200.

What happened during April?

Wesfarmers didn’t announce any market-sensitive news during the month.

However, on the last day of March 2022, the ASX 200 share did announce the completion of the Australian Pharmaceutical Industries acquisition. Wesfarmers paid $1.50 per share to API shareholders. It said that the initial capital was $1.025 billion, with $774 million being paid to API shareholders plus the estimated funding requirement for API’s net debt and the working capital balance.

Wesfarmers says that API will be the foundation business of a new health division. It’s going to develop capabilities and invest in the growing health, wellbeing and beauty sector. Management see opportunities to strengthen the competitive position of API and its partners, by expanding product ranges, improving supply chain capabilities, and improving the online experience for customers.

What could happen next for the Wesfarmers share price?

There has been a lot of talk about inflation and rising interest rates this year.

In terms of managing inflation, Wesfarmers said that it “continues to actively manage increasing inflationary pressure and will leverage its scale to mitigate the impact of rising costs. The group’s retail businesses will increase their focus on price leadership and are well positioned to continue to provide customers with great value on everyday products as rising cost-of-living pressures impact household budgets.”

Time will tell what this means for the Wesfarmers retail profit margin and how much extra product volume it sells.

COVID-19 continues to have an impact. The company said it is incurring additional costs and experiencing “stock availability impacts” as a result of ongoing global supply chain disruptions, elevated team member “absenteeism”, and delays with third-party logistics providers.

Supply chain disruptions, higher transport costs and constraints in domestic labour markets are expected to continue in the second half.

Retail trading conditions were “subdued” in January, which Wesfarmers put down to rising cases of Omicron, impacting both customer traffic and labour availability. However, it said that trading momentum was improving in February 2022.

What next for the Wesfarmers share price?

One recent rating comes from Citi, with a price target of $50. That implies the Wesfarmers share price will barely move over the next year.

Citi thinks that Wesfarmers could be a beneficiary of government stimulus to help the population.

The broker is neutral on the business. According to Citi’s estimates, the Wesfarmers share price is valued at 24x FY22’s estimated earnings and 22x FY23’s estimated earnings.

Citi thinks Wesfarmers will pay a grossed-up dividend yield of 5.4% in FY22 and 5.8% in FY23.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. 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 has positions in and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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