Should I buy Wesfarmers shares near $50 for the recovery?

This blue chip is heading back towards a valuation milestone – is it too late to invest?

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Key points
  • Shareholders of Wesfarmers have benefitted from a steady gain since mid-October
  • As it approaches $50, some brokers still think it's a buy
  • The business is still seeing strong trading conditions for its main retailers

The Wesfarmers Ltd (ASX: WES) share price has been through plenty of pain over 2022.

Since the beginning of 2022 it's down around 20%. At one point in June, it was down by more than 30%.

But, with the company's share price now getting close to $50. There is a question about whether the business is a buy with how much it has already recovered. Since that low in June, the Wesfarmers share price has gone up 17.5%.

A person bounces another up high from a seesaw as the one in the air looks through a telescope into the future.

Image source: Getty Images

Is it a buy at this level?

The broker Morgans certainly thinks so. It has an add rating on the company with a price target of $55.60. A price target is where the broker thinks the share price will be in 12 months from the rating. That Morgans price target implies a rise of around 15%.

Morgans notes that there continue to be strong retail trading conditions, and it thinks it's a solid long-term investment.

The broker UBS puts the price target at $56, which implies a rise of 16%. It remains optimistic about the company's prospects after its October AGM update.

However, not every broker is positive on the Wesfarmers share price. Citi rates it as a sell with a price target of $40. It questioned how profit margins may perform from here, while noting that other ASX retail shares could be better value.

Wesfarmers share price valuation

On Citi's numbers, the company is valued at 23x FY23's estimated earnings and 21x FY24's estimated earnings.

But UBS has a more rosy view of the company's profit generation. The broker puts Wesfarmers shares at 22x FY23's estimated earnings and under 21x FY24's estimated earnings.

Commentary about 2023

After the Reserve Bank of Australia's (RBA) latest interest rate rise, UBS commented:

The Australian economy is continuing to grow solidly. Economic growth is expected to moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions. The Bank's central forecast is for growth of around 1.5% in 2023 and 2024.

In other words, spending could remain strong and a recession isn't expected.

The business outlined performance at the AGM for a number of its divisions. WesCEF (chemicals, energy and fertilisers) has "continued to benefit from strong customer demand and elevated commodity prices, and development of the Mt Holland lithium project is progressing well".

Bunnings, the key profit generator, has seen "overall sales growth for the year-to-date remains resilient and continues to be supported by strong demand from commercial customers. While sales growth from DIY customers remains positive, it has moderated from the high levels experienced through COVID." This performance could be the key driver for the Wesfarmers share price.

Sales growth for Kmart and Target through the year to date continue to be "pleasing", with "strong trading results even when adjusted for the impact of lockdowns in prior periods".

Kmart in particular could benefit in an environment where shoppers are "more focused on value".

Results from the health division have been "pleasing", with "strong growth in wholesale and improvements in performance in Priceline and Clear Skincare Clinics".

Wesfarmers share price long-term performance

While past returns are not a reliable indicator of future performance, the Wesfarmers share price has gone up over 50% over the past five years and divested Coles Group Ltd (ASX: COL) out of the business.

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 Coles Group and Wesfarmers. 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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