Why this broker just upgraded Wesfarmers shares to a buy rating

Now could be the time to pounce on Wesfarmers Ltd (ASX: WES) shares.

That’s the view of analysts at Goldman Sachs, which have just upgraded the Bunnings owner’s shares.

What is Goldman saying about Wesfarmers shares?

Goldman has been looking at the consumer and housing markets and believes that Wesfarmers is well-positioned to benefit.

In respect to the housing market, the broker said:

More resilient Australian housing outlook with median house prices +8% in CY23 and a further +2%/6% in CY24E/25E, implying higher property transactions/alts & adds to come. We thus raise Bunnings FY24-26e sales by 0-3%, EBIT by +5-13%, with FY24 sales/EBIT to grow +2%/+1%, then accelerate to a +6%/+11% sales/EBIT CAGR in FY25/26 as cost optimizing and digitalization initiatives drive margin expansion.

In addition, Goldman believes that the strong cashflow generated by Bunnings will be able to support other growth opportunities. It adds:

We expect strong A$2.5B-A$3.0B Bunnings annual free cashflow generation to fund new growth platforms including 1) Health and 2) Lithium. With the completion of the SILK Laser acquisition in November 2023, we now expect the Health segment to drive higher growth and profitability from the attractive non-invasive aesthetics industry and switch to a DCF valuation of A$2.2B.

So, with Wesfarmers shares trading at a discount to historical averages, the broker believes that now is the time to invest.

Upgraded to buy

Goldman has upgraded the company’s shares to a buy rating (from neutral) with a price target of $62.90 (from $49.80). This implies potential upside of 9.4% for investors over the next 12 months.

And if you include the 3.3% fully franked dividend yield the broker is forecasting for FY 2024, the total potential return stretches to 12.7%. Goldman summarises:

Our Buy is premised on a buoyant Australian housing market supporting Bunnings resilience and in turn generating strong annual free cashflow of A$2.5B-A$3.0B to fund 2 new high growth and high returns platforms, Health and Lithium, contributing ~9% of EV and enabling FY23-26e group sales/EBIT of ~3%/~8%.

The post Why this broker just upgraded Wesfarmers shares to a buy rating appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group and Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. 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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