The Wesfarmers Ltd (ASX: WES) share price has been sliding lower and today hit a two-year low of $44.65. Could now be a good time to consider buying shares in the retail conglomerate?
At the close of trade, Wesfarmers shares are down 0.7% at $45.24. They have fallen almost 25% since the beginning of the year and are closer than ever to the March lows seen in the COVID-19 crash of 2020.
Is the Wesfarmers share price a buying opportunity?
It’s an interesting question, considering interest rates are rising and inflation is building in Australia.
Ray Dalio, the billionaire founder of Bridgewater Associates, explains why interest rates are so important for asset values:
It all comes down to interest rates. As an investor, all you’re doing is putting up a lump sum payment for a future cash flow.
There has been plenty of the elevated inflation in different areas of the economy, such as energy, during 2022, particularly after the Russian invasion of Ukraine. So, the second half of FY22 will deliver the results for investors to keep an eye on.
How is the company coping with inflation?
Wesfarmers said in February 2022 that it was actively managing increasing inflationary pressure and would leverage its scale to mitigate the impact of rising costs. It also said the group’s retail businesses would “increase their focus on price leadership”.
However, the company did note that it was incurring additional costs and experiencing stock availability issues due to the global supply chain disruptions, elevated team member absenteeism and delays with third-party logistics providers.
In the first half of FY22, Wesfarmers reported that its underlying net profit after tax (NPAT) fell by 14.2% to $1.2 billion. I think it will be interesting to see how Wesfarmers has responded to inflation in the six months to June 2022.
Challenging times for Wesfarmers
Things are looking a bit tougher for Wesfarmers. Australian households may not have as much money to spend at the retail giant’s brands such as Bunnings, Officeworks, Kmart, Target and Catch.
Falling Australian house prices could also be a headwind for Bunnings’ earnings if people spend less on improving their houses and more on loan repayments instead.
But plenty of tailwinds…
I think that Wesfarmers is one of the best businesses on the ASX. It has proven to be effective at buying the right businesses and building them into strong brands for the long-term future. This includes the Mt Holland lithium project.
While earnings may drop in the shorter-term, the company is doing the right thing by building new growth avenues, in my opinion. The Australian Pharmaceutical Industries acquisition is the beginning of a health and beauty division for Wesfarmers, opening up another earnings stream for the company.
Bunnings is one of the leading retailers in the country, I believe. It earns strong profit for Wesfarmers and it has the ability to grow through expansion with other businesses such as its recent acquisition of Beaumont Tiles.
I think that the Wesfarmers share price is also attractive because the business continues to pay attractive dividends to shareholders. That’s a useful way to boost total returns.
I believe that Wesfarmers is a long-term opportunity. The diversified nature of the business lowers the risk in times like this and opens up more potential opportunities, in my opinion.