Should I buy Wesfarmers shares before the company reports this week?

Wesfarmers Ltd (ASX: WES) shares are taking centre stage this week with the company scheduled to report on 15 February 2023.

It’s a very interesting time period for the business because the FY23 first half is being compared against the first half of FY22. In HY22, regions like Victoria and NSW were still under COVID lockdowns.

With the ending of COVID-19 restrictions on bricks and mortar stores, the retail businesses are seemingly doing well. Wesfarmers owns various retailers like Bunnings, Kmart, Target, Officeworks and Priceline.

For example, we’ve already heard from JB Hi-Fi Limited (ASX: JBH) which reported that total sales increased by 8.6% to $5.3 billion and net profit after tax (NPAT) was up by 14.6% to $330 million.

What’s driving the Wesfarmers share price recently?

The Wesfarmers share price has dropped by 4% since 3 February 2023.

A large part of that decline may be explained by the market’s reaction to the news that the Reserve Bank of Australia (RBA) is going to keep rising interest rates to push down on inflation.

The RBA said that strong domestic demand is adding to inflationary pressures in a number of areas of the economy, and unemployment is at the lowest rate since 1974. Wages growth is picking up, with more expected because of the tight labour market and higher inflation. The RBA wants to avoid a price-wages spiral.

Australia’s central bank wants to return inflation to its target of between 2% to 3%. Inflation may not get back to 3% by mid-2025 according to the RBA’s central forecast.

Therefore, more interest rate increases are expected in the months ahead.

While higher interest rates are not ideal for households, the comments about the strength of the economy may suggest that Wesfarmers’ earnings could remain strong up to this point, which would be good for the Wesfarmers share price.

Indeed, at the company’s annual general meeting (AGM) in late October it said that combined sales growth for Kmart and Target in the year to date continued to be “pleasing”.

Bunnings sales for the year to date were “resilient” and continued to be supported by “strong demand from commercial customers”.

Officeworks sales in the year to October were “broadly in line with the prior year”.

Wesfarmers chemicals, energy and fertilisers (WesCEF) continued to benefit from “strong customer demand and elevated commodity prices”.

The industrial and safety division “continued to improve” with sales growth across all business units.

Time to buy?

It’s not all going Wesfarmers’ way, the business was also contending with elevated supply chain costs, rising wages and higher utility costs.

With the Wesfarmers share price down by around 25% since August 2021, I think it looks much better value.

Commsec estimates suggest that Wesfarmers earnings per share (EPS) could grow this year, putting it at 22 times FY23’s estimated earnings.

I think the diversification of the business, with a focus on expanding in some industries like lithium and healthcare, gives me confidence about the company’s long-term future.

The Wesfarmers share price may drop further in 2023 at some point, but that’d make it even more attractive to me.

The post Should I buy Wesfarmers shares before the company reports this week? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Jb Hi-Fi. 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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