The Wesfarmers Ltd (ASX: WES) share price is at a very attractive level, in my opinion.
Wesfarmers shares have fallen by almost 30% in 2022 to date. Is the long-term value of Wesfarmers really worth almost a third less than it was at the start of the year? I don't think so.
Economic cycles happen. They're happening all the time. We're in a cycle right now. I believe that it's a good time to invest when there's pessimism about the outlook.
A lot of Wesfarmers' earnings come from retailers such as Bunnings, Officeworks, Catch, Kmart, and Target. It's true that retailers can find it difficult to grow earnings if their customers are doing it tough during a downturn.
However, I believe Wesfarmers is higher-quality than what some investors are giving it credit for. Short-term pain could be a long-term opportunity.
After the current volatility, I think the Wesfarmers share price looks good value for a few key reasons.
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Wesfarmers share price at an attractive valuation
One of the easiest ways to value a business is by looking at the share price in relation to the multiple of earnings that it's priced at.
After such a big drop in the Wesfarmers share price, the price-to-earnings (P/E) ratio now looks much more manageable.
According to CMC, the company is valued at 22 times FY22 estimated earnings and 20 times FY23 estimated earnings.
Based on the earnings projections, Wesfarmers is expected to grow its profit in FY23 and then again in FY24. Profit growth could help the company regain investor sentiment.
While it could certainly drop further, the Wesfarmers share price is currently close to a multi-year low.
Besides being cheaper, another benefit of a lower share price is that it also boosts the potential dividend yield on offer.
Based on dividend estimates on CMC, Wesfarmers is predicted to pay a grossed-up dividend yield of 5.5% in FY22 and 6% in FY23.
Market-leading retailers
Bunnings, Officeworks, and Kmart are all very strong competitors in their respective categories.
Bunnings is very strong in the home improvement and hardware segment. It earns big returns for Wesfarmers every year. In the FY22 half-year result, Bunnings generated a return on capital (ROC) of 79%.
It proved its strength a few years ago when Woolworths Group Ltd (ASX: WOW) and Lowe's Companies Inc (NYSE: LOW) tried to challenge Bunnings with the Masters business. But Bunnings was too strong and Masters was closed.
Officeworks and Kmart are both good earners for Wesfarmers as well, but don't earn as much. In HY22 the Officeworks ROC was 19.6% and the Kmart Group ROC was 24.5%.
Bunnings continues to be improved through acquisitions (including Beaumont Tiles) and growth through e-commerce.
Diversification plays
I like that Wesfarmers is a diversified business with operations across several sectors.
I think this makes Wesfarmers more resilient in downturns, while also giving management a wider array of potential investments to look at.
Lithium is one of the promising areas of the business with the Mt Holland project.
Healthcare and beauty is now another possible area of growth for the business after the acquisition of Australian Pharmaceutical Industries (API). This business, which is the owner of the Priceline Pharmacy network, is the foundation of the new health segment.
It will be interesting to see what other opportunities Wesfarmers finds in the healthcare space.
The Wesfarmers share price is $42.34 in early trading on Thursday, down 0.77%
