Could it be possible for the Wesfarmers Ltd (ASX: WES) share price to rise to $60 by Christmas? That would suggest a 9% increase of Wesfarmers shares on the next two and a half months if it were to happen.
The Wesfarmers share price has actually already been as high as $66 this year. The company has actually dropped by around 17% from there.
Since 20 August 2021, the S&P/ASX 200 Index (ASX: XJO) has fallen by around 2%. That shows that Wesfarmers shares have materially underperformed the ASX 200 in that time.
What’s happening for the company at the moment?
The retail conglomerate has offered $1.55 per share to buy the whole business. Wesfarmers is currently progressing with its confirmatory due diligence investigations for its proposed purchase.
A couple of weeks ago, Sigma Healthcare Ltd (ASX: SIG) also offered to acquire API. Wesfarmers believes that its offer is better than Sigma’s.
The company announced this week that it was buying 95.1 million shares, being 19.3% of API, from Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). With this stake, it’s going to vote against any proposal by Sigma that is put to shareholders.
Wesfarmers managing director Rob Scott said the Wesfarmers proposal would deliver an attractive premium and certain cash return to API shareholders:
Wesfarmers continues to see opportunities to invest in and strengthen the competitive position of API and its community pharmacy partners. Exercising our option to acquire 19.3% of API reflects the group’s commitment to the transaction and the continued progress of the Wesfarmers proposal.
Could the Wesfarmers share price hit $60?
The broker UBS certainly thinks so. Indeed the price target is actually $62. However, that is where UBS thinks Wesfarmers could be in 12 months from now – not necessarily by Christmas.
UBS currently rates Wesfarmers as ‘neutral’, though it thinks the API acquisition could be good if it goes ahead and add to profit.
Wesfarmers has said that API could form the start of a healthcare division and a platform from which to invest and develop capabilities in the growing health, wellbeing and beauty sector.
At the current Wesfarmers share price, it’s valued at 27x FY22’s estimated earnings by UBS.
How is trading going?
When the company announced its FY21 result, it gave a trading update for its different businesses for the first couple of months of FY22.
Bunnings, by the far the biggest profit generator, had seen sales decline 4.7% with solid growth from commercial customers, offset by a decline in consumer sales as the business cycled elevated demand in the prior period. Compared to two years ago, sales were up 24.4%.
Combined Kmart and Target sales were down 14.3%, reflecting the significant impact of COVID-19 restrictions such as store closures. In the middle of August, almost half of its stores were closed across Australia and New Zealand.
Catch gross transaction value was down 8.5% year on year, though up 112.5% compared to two years ago.
Finally, Officeworks sales were down 1.5% year on year, though it was up 31.1% over a two-year period.
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Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited and Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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