The Wesfarmers Ltd (ASX: WES) share price has fallen 5.99% lower in 2020, but is the Aussie conglomerate in the buy zone?
Why the Wesfarmers share price has slumped lower
Normally a year to date share price fall of 5.99% wouldn’t be considered a good thing. However, the S&P/ASX 200 Index (ASX: XJO) has slumped 16.62% over the same period which means the group’s shares have actually outperformed in 2020.
Investors are struggling to value many businesses in the current climate and the Wesfarmers share price is tough to evaluate at the best of times. The company has interests in a wide range of industries and sectors including retail, mining and chemicals.
Investors are clearly pricing in a potentially negative impact on earnings from COVID-19 in 2020. I think one of the hardest-hit areas of the business could be the group’s retail arm which includes brands like Kmart and Target.
However, I think the Wesfarmers share price could currently be undervalued and here are a few reasons why…
Wesfarmers has a lot of cash right now
Wesfarmers has been sitting on a big pile of cash for years. How big? The group’s FY 2019 annual report from August 2019 suggests it’s a $795 million pile. This could swell even larger in 2020 after the $1.1 billion sale of another part of its stake in Coles Group Ltd (ASX: COL).
That’s good news for shareholders and the Wesfarmers share price in the current environment. Cash is king right now and Wesfarmers has plenty. On top of that, it could be well-placed to pounce on any undervalued companies targeted for acquisition.
The conglomerate is always looking for efficiency
Despite some potential business challenges, Wesfarmers is always looking to improve efficiencies. The group recently flagged closures for underperforming Target stores and sold off its remaining coal mining interest in December 2018.
These improvements in efficiency could be good news for the Wesfarmers share price in 2020. If the business uses the current climate to continue re-aligning its strategy, earnings could be more stable than many investors expect.
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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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