Wesfarmers Ltd (ASX: WES) shares were in the spotlight last week when the conglomerate released its full year results.
Have these results led to a big valuation upgrade for the Bunnings owner? Let's see what Macquarie Group Ltd (ASX: MQG) is saying about the popular ASX share.
What is the broker saying?
Macquarie notes that the company is a "quality compounder" thanks largely to its focus on value retail, which has performed well despite shifts in consumer preferences and the cost of living crisis. It said:
WES is a quality compounder. How does a conglomerate structure create this outcome? WES has shifted its portfolio increasingly towards retail over time. But not just any retail, value retail. Brands in the grocery, discount retail, health and wellness and essential services (home) seem to have maintained strong performance despite shifting consumer preferences and economic headwinds. In value retail, the best strategy isn't to chase every trend, but to master the basics and manage uncertainty.
The broker also points out that Wesfarmers has businesses that are building moats and that the market is increasingly willing to pay a premium to own its shares because of this. It adds:
Consumers in these categories aren't just price sensitive, but value smart and willing to switch or trade-down to private label. WES plays in private-label rich segments (incl home improvement). These segments tend to be less discretionary and contestable shopping missions. They are in large addressable markets where low cost and scale are differentiators. The market is valuing these 'moat' characteristics highly.
Should you buy Wesfarmers shares?
While the broker acknowledges that there is a lot to like about Wesfarmers, it thinks its valuation is full at current levels.
As a result, Macquarie's analysts have retained their neutral rating on its shares with an improved price target of $86.00.
Based on its current share price of $91.81, this implies potential downside of 6% for investors over the next 12 months.
Commenting on its neutral rating and current valuation, Macquarie said:
Retain Neutral. Wesfarmers continues to deliver robust earnings growth over the long term, and through the cycle. High-quality business, but valuation remains challenging.
Valuation: TP increases 5% to $86.00, driven by the extension of our DCF modelling to 10 years (prev 5), to capture the sustained cash earnings growth. We lift our TGR by 20bps (4.20%) to match RFR assumption. Catalysts: Macquarie HFCD and Fonto data; Housing indicators (alts & adds; construction approvals and commencements)
