The Wesfarmers Ltd (ASX: WES) share price outperformed the S&P/ASX 200 Index (ASX: XJO) in the first three months of FY25. Wesfarmers shares climbed by 8%, and the index climbed by 6.5%.
In recent times and in the long term, it has been good to invest in shares locally and globally. Part of the rally appears to have been spurred by central banks cutting interest rates.
For example, the US Federal Reserve recently decided to cut the US interest rate by 50 basis points (0.50%), which is a large movement. Normally, central banks move in increments of 25 basis points.
Investors were seemingly surprised by the size of the cut and sent up asset prices like shares.
Why the company continues winning
Wesfarmers owns two of the biggest retailers known for value products – Kmart and Bunnings.
At a time when the cost of living is high, and some households are struggling, these two businesses are capturing market share and continuing to deliver impressive profits.
Wesfarmers reported its FY24 result during the first quarter of FY25. Investors appear to have generally liked the result, considering the Wesfarmers share price achieved a market-beating performance over the last three months.
FY24 net profit rose 3.7% to $2.56 billion, with revenue going up 1.5% to $44.2 billion. Bunnings grew revenue by 2.3% to $19 billion and increased earnings by 0.9% to $2.25 billion, while Kmart Group achieved revenue growth of 4.4% to $11.1 billion and earnings jumped 24.6% to $958 million.
In the first eight weeks of FY25, Wesfarmers reported both Kmart Group and Bunnings achieved sales growth, though Bunnings is being affected by softening in building activity.
Can the Wesfarmers share price continue its run?
Wesfarmers said that its larger businesses are:
…benefiting from investments made to digitise their operations and develop sourcing capabilities. Together with benefits from proactive productivity and efficiency investment over recent years, this provides confidence in the group's ability to adjust costs in line with trading conditions.
Broker UBS has forecast that in FY25, Wesfarmers' revenue can rise to $43.3 billion, and the net profit can increase to $2.64 billion.
However, while expecting profit growth, UBS is not optimistic on the short-term direction of the Wesfarmers share price. It has a sell rating on the major retailer, with a price target of $66.
UBS commented:
…we recognise that WES has strong growth options across all divisions (as per Strategy Briefing Day) and is well positioned to manage the current external environment (value based retail, critical/growth industry exposure), with a strong balance sheet to fund disciplined capital deployment. However, WES is trading at high earnings multiples vs its history and vs peers, with the WES share price implying Bunnings is trading at a FY25E of 34x P/E.
These earnings multiples are at too significant a premium for the growth & outlook, in our view, making the risk/reward unattractive.
UBS doesn't seem to think the Wesfarmers share price will rise over the next 12 months. Time will tell if that pessimism is well-founded or not.
