Wesfarmers Ltd (ASX: WES) shares have been rising over the last six months. Is this a solid, defensive S&P/ASX 200 Index (ASX: XJO) stock to own in the current environment?
There are a number of different businesses within the Wesfarmers stable including Bunnings, Officeworks, Kmart, Target and Priceline.
It may be said that each of these businesses could have varying levels of resilience during an economic downturn.
I think the recent past could be a useful guide about what may happen. I'm not talking about the COVID-19 period. Wesfarmers' financials performed excellently during the pandemic in my opinion.
Image source: Getty Images
The last difficult period
The coronavirus period was certainly tricky for many businesses. But, for Wesfarmers there was a huge demand for products sold by Bunnings and Officeworks.
But, FY19 may be a good example of somewhat similar conditions where house prices had fallen and economic demand was lower.
In that result, Wesfarmers' continuing operations earnings before interest and tax (EBIT) increased 12.2% and net profit after tax (NPAT) grew 13.5%. Bunnings managed to grow earnings.
But, as the saying goes, past performance is not a guarantee of future performance for the ASX 200 stock.
Are Wesfarmers shares defensive?
I think it's important to say that no share price is impervious to volatility. Even if a company's profit isn't affected by a downturn, the market can still decide to push down a share price due to investor pessimism.
However, I believe that Wesfarmers is well-positioned to outperform in the current environment, making it a defensive ASX 200 stock.
In a time when household budgets may be stretched and particularly value-conscious, the price-focused businesses of Bunnings and Kmart could attract more customers than competitors.
Considering Priceline is a business that operates in the healthcare sector, it could also display good earnings.
The Wesfarmers chemicals, energy and fertiliser (WesCEF) segment seems to continue to perform thanks to the demand for commodities.
In my opinion, a good majority of Wesfarmers' earnings could grow in FY23. Commsec estimates suggest that the company could generate earnings per share (EPS) of $2.14 in FY23 and $2.25 in FY24. This would put Wesfarmers shares at 24 times FY23's estimated earnings and 23 times FY24's estimated earnings.
Is the Wesfarmers share price a good buy?
I think Wesfarmers is usually a good business to consider because of its diversified operations and ability to invest in new businesses.
It's not as cheap as it was last year. But, I think it has the potential to deliver capital growth, as well as good dividends.
There may be a bit of pain if interest rate effects hit harder than expected. But, over the long term, I think Wesfarmers is one of the most interesting and compelling ASX 200 stocks out there. I'd call it a buy.
