Now could be the time to buy Wesfarmers Ltd (ASX: WES) shares.
That's the view of analysts at Goldman Sachs, which have just turned positive on the conglomerate.
What is the broker saying about Wesfarmers shares?
According to a note released this morning, Goldman has upgraded the Bunnings owner's shares to a buy rating (from neutral) with an improved price target of $78.70. It said:
After a strong year of stock performance in CY24, we continue to see new drivers of growth in WES to drive both earnings and valuation upside and upgrade from Neutral to Buy, new TP of A$78.7/sh (vs A$69.5/sh) on 3 key points.
Based on the current Wesfarmers share price of $72.32, this implies potential upside of 8.8% for investors over the next 12 months.
In addition, the broker is forecasting a fully franked 2.7% dividend yield in FY 2025. This boosts the total potential return to 11.5%.
Why is the broker bullish?
As mentioned above, there were three key reasons why Goldman upgraded Wesfarmers shares today.
The first relates to the Bunnings business, which it believes is positioned to grow quicker than the industry and win market share. It said:
Bunnings market share gain: Australia housing starts/approvals remain lacklustre, though R&R is more resilient and Bunnings is positively indexed with 60/40 sales DIY/Trade. We forecast 1H25 Bunnings sales +2.6% YoY to be above ABS Home Improvement category +1% YoY (Jul-Nov 24).
Another reason that Goldman is positive is the prospect of Bunnings growing its sales per square metre (sqm) metric and utilising its customer data to grow the Retail Media business. The broker adds:
We continue to see ample headroom for sales/sqm growth via category optimization. When comparing to Home Depot in the US, we calculate Bunnings' sales/avg sqm was ~A$4.7K in FY24, compared to ~A$9.3K for Home Depot in CY23. Comparing against Home Depot's sales mix by category, it appears that Bunnings is under-indexed to 2 categories including Appliances and Tools.
After a period of investment into omni-channel and customer data assets over the last few years, we are now seeing the Bunnings website traffic surpass Woolworths Australian Food with average monthly visits at ~20.4mn, as well as an acceleration in APP downloads. Per the Company's announcement on Jan 21, 2025, WES now has >12mn consumer data records. In our opinion, this opens up further adjacent revenue streams such as Retail Media and Marketplace as we have seen with some other retailers including WOW and COL.
Lithium and health earnings to grow
Finally, Goldman feels that the company's lithium and health operations are about to contribute growing earnings. It explains:
GSe FY25 Health/Lithium EBIT of ~A$50mn increasing to ~241mn by FY26, due largely to Kidman turning positive profit. Catch closure will reduce losses. Together with strong core retail, we expect group EBIT growth to accelerate from ~3% in FY25 to ~14% in FY26.
In light of the above, the broker believes that "WES will have the highest F24-27 EPS CAGR of 10% in our top 5 consumer coverage (vs WOW, COL, EDV, JBH) while ROIC will expand by 6pts to 25% vs peers flat, resulting in DCF and SOTP valuation uplift."
It feels that this makes the company a buy at current levels.
