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I believe that Wesfarmers shares look like good value right now.
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Tristan Harrison has been a contributor to The Motley Fool since October 2016. He has an advanced diploma from the Association of Accounting Technicians (UK) and is currently studying to be a Chartered Institute Management Accountant. Tristan's goal is to help Australians learn about the great businesses listed on the ASX that will help grow their portfolio, wealth and confidence about investments over the long term. He's a keen tennis fan and can't wait for the next Australian Open to roll around.
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Published
I think the Wesfarmers Ltd (ASX: WES) share price is now looking like good value for long-term investors right now.
It has been a difficult year for Wesfarmers so far, with the company’s share price falling by more than 20% in 2022. However, I believe that this lower price now represents a compelling long-term opportunity with the ASX share.
Higher interest rates, strong inflation, supply chain disruptions and geopolitical events have caused a lot of volatility in the ASX share market. Wesfarmers hasn’t escaped.
However, I believe that the Wesfarmers share price can do well over the next decade.
There are three main reasons why I think the ASX share could be worth owning.
Bunnings
In my opinion, Bunnings may be one of the best businesses in Australia. It earns more than two-thirds of Wesfarmers total earnings before tax (EBT), after excluding significant items.
Even in the face of slowing economic conditions, Wesfarmers managed to achieve revenue growth with Bunnings with a 1.7% increase of revenue to $9.2 billion in the first half of FY22. The company said that its performance for the half reflected its ability to meet customers’ needs through a range of operating conditions and “further highlighted the resilience and flexibility of the model”.
While it’s possible that slowing housing construction and a slowdown of DIY projects could dampen shorter-term demand for Bunnings, I think it’s a category leader in its sector that can keep making good profits.
In the first half of FY22, Wesfarmers said that Bunnings generated a return on capital of 79%, up from 76.65% in the previous year. That’s a very high number and shows how valuable Bunnings is to Wesfarmers.
Wesfarmers can keep investing in Bunnings, such as improving its online offering and acquiring other small businesses like Beaumont Tiles.
Lithium is an area that Wesfarmers is trying to get exposure to. Its joint venture is called Mt Holland. While that project isn’t up and running yet, I think Mt Holland is compelling because the lithium price is rising over time, which will make Mt Holland more valuable to the company. In the FY22 half-year result, Wesfarmers said that it had spent $139 million in the first half of the year.
The demand for lithium is rising alongside the rise in home batteries and electric vehicles, as the number of batteries needed increases. While Mt Holland won’t be the biggest global lithium mine, it will help diversify Wesfarmers’ earnings away from retail and probably have an influence on the Wesfarmers share price.
Healthcare and beauty
I also like the move by management to buy the Australian Pharmaceutical Industries business.
Management can use this as the basis for a new health, beauty and wellness division. Healthcare has useful tailwinds such as ageing demographics, which can help the long-term trajectory of the business.
Healthcare is a large and fairly defensive sector which can help Wesfarmers become a more resilient business. It’s also very diverse, so it gives the ASX share plenty of opportunities to look at. Amid all of the current volatility, it could be looking at a new healthcare opportunity right now.
Final thoughts
Not only is Wesfarmers diversifying its operations, it also normally offers a reasonable dividend payout as well. So, I think that Wesfarmers can generate attractive and growing earnings, while paying a solid dividend to investors.
