Wesfarmers Ltd (ASX: WES) shares have had a good start to FY24, with the Wesfarmers share price up close to 10%. Are investors getting ahead of themselves, or is the outlook for 2024 improving?
For the readers that don't know, Wesfarmers is the owner of numerous businesses including Bunnings, Kmart, Officeworks, Target, Priceline and a number of others.
Is inflation and the cost of living hurting Wesfarmers shares?
At the recent annual general meeting (AGM), the company acknowledged the changes in economic conditions that "necessitated various operational responses" during 2023 and these have continued into FY24. However, Wesfarmers' managing director believes that in many ways it's "an environment that plays to Wesfarmers' strengths."
The managing director said that businesses that have "genuine competitive advantages and are executing well will shine" and "this environment also benefits companies with strong balance sheets and allowed disciplined allocators of capital such as Wesfarmers to take advantage of investment opportunities."
Businesses like Bunnings, Kmart and Officeworks want to offer customers "strong value credentials" at a time when households and businesses are focused on their budgets. Wesfarmers' businesses managed to achieve earnings growth in FY23 while retaining their price positioning.
The company is proactively investing in productivity and efficiency initiatives, including projects to modernise its supply chain, digitise its operating processes and increase the use of AI and predictive analytics.
In recent trading, costs were higher across wages, energy and due to a lower Australian dollar. In the first 16 weeks of FY24, Bunnings had managed to achieve sales growth in line with the second half of FY23, with growth in both the consumer and commercial segments. Bunnings is the key division for Wesfarmers shares, due to how much of the profit it makes.
Strong results continued for Kmart, thanks to the value offered by its Anko products, which were "resonating with an increasingly wide cross-section of households." Officeworks sales were "broadly in line" with the prior period and the industrial businesses are expecting to see significantly lower earnings because of a lower ammonia price and higher gas costs.
The first lithium hydroxide sales from Mt Holland aren't expected until the first half of the 2025 calendar year.
Overall, management thinks the economic conditions will present both opportunities and challenges, but suggested that Wesfarmers is well-positioned to deal with whatever happens.
Forecast profit and dividend valuation
Using the estimates on Commsec, the company could generate $2.18 of earnings per share (EPS) and pay a dividend per share of $1.91 in FY24. The forecast numbers are extremely similar to what happened in FY23.
At the current Wesfarmers share price, it's valued at less than 25 times FY24's estimated earnings with a grossed-up dividend yield of around 5%.
