Wesfarmers Ltd (ASX: WES) shares hit a 52-week high of $77.20 in late August, but they have since sold off and have yet to recover.
The retail conglomerate currently trades at $71.865 apiece, 7% below the yearly high.
Despite this dip, Wesfarmers shares are up 26% this year, significantly outperforming the broader market.
With year's end fast approaching, the key question now is whether this marks a buying opportunity or if investors should sit this one out on the sidelines. Let's see what the experts say.
What's pressuring Wesfarmers shares?
Wesfarmers shares turned a corner after reaching a 52-week high in August when the company posted its FY24 numbers.
Leading up to the date, the stock was priced at more than 31 times earnings, so even the slightest undershoot from expectations was sure to lead to disappointment. In other words, reduced valuations.
Such has been the case, with investors compressing the price-to-earnings (P/E) on Wesfarmers stock to below 29 times in November.
Brokers have been all over this, and now consensus rates Wesfarmers a sell, according to CommSec.
Goldman Sachs, for instance, recently downgraded its expectations on the stock, citing a stretched P/E equal to around 30 times FY25 estimates.
The broker said Wesfarmers was one of the "clear market share leaders and winners" in the retail space, but investors had captured this in present market values.
[W]e believe that this is now fully factored into the current share prices, with the outperformance driving a level of investors 'hiding'"' in safety given the underperformance of Staples and the volatility of Global Growth consumer names…
…We update our WES forecasts post its AGM with group topline -0%-1% and EBIT -3%- -4% on the back of slight cuts in Kmart sales/margins as well as expanding "Other Expenses" to A$200mn.
It has a hold rating on the business with a price target of $68, implying a modest downside from current levels.
Can Wesfarmers shares bounce back?
Let's take stock of things quickly. Two facts are pertinent. First, Wesfarmers is a giant retail conglomerate with a highly diversified business model spanning retail, healthcare, and even lithium production through its stake in Covalent Lithium.
This 'fingers in all pies' approach means it does get to have its cake and eat it, too. In other words, it produces earnings from multiple sectors of the economy, giving what I call 'recession-proof earnings'.
I'm not sure the rate of pharmacy scripts being filled will reduce in the event of an economic downturn, for instance (Wesfarmers owns Priceline Pharmacy, InstantScripts, and Soul Pattinson Chemist).
But the core businesses, Bunnings and Kmart, continue to shine. Bunnings ended the year with a return on capital of 69.2% in FY24, an impressive figure by global retail standards.
There is also the dividend cushion provided by the company's extensive history of returning capital to shareholders.
Consensus estimates expect Wesfarmers will deliver dividends of $1.98 per share this year and $2.36 per share in FY26, a compounding growth rate of 9.2% per annum.
What are the risks?
While Wesfarmers' diversified portfolio is a strength, it's not immune to broader market risks. The company faces challenges from increased competition in the retail sector, particularly in segments like healthcare and consumer electronics.
Goldman Sachs has also warned of potential margin pressures from increased promotional activity during key sales periods, such as Black Friday and Boxing Day.
There's also regulatory scrutiny. The crown jewel, Bunnings, has faced criticism for its market dominance and supplier practices.
Although such scrutiny has yet to translate into anything material for the company, it's not something to ignore, in my opinion.
Foolish takeaway
Wesfarmers shares have a proven track record despite being sold down from a 52-week high this year.
While the stock still trades at a premium valuation, experts say its long-term growth potential and dominant market positions are factors to consider.
In the last 12 months, the Wesfarmers share price has climbed 37.6%.
