Construction Slowdown May Challenge Bunnings, But Tech Investments May Improve Customer Experience

Key Takeaways

• Construction sector challenges and global commodity volatility could affect Wesfarmers' revenue growth and profitability.
  
• Retail competition and ongoing investment in acquisitions may pressure margins and near-term earnings.
  
• Strong operational execution, robust retail growth, strategic pricing, and focus on technology indicate sustained profitability and potential long-term financial benefits for Wesfarmers.

Catalysts

Engages in the retail business in Australia, New Zealand, and internationally.

• Wesfarmers' future growth might be impacted by challenges in the construction sector, with potential slowdowns in building activity affecting Bunnings' sales, which could constrain revenue growth.
  
• Continued volatility in global commodity prices is expected to affect WesCEF's earnings outlook, potentially impacting the company's margin and profitability.
  
• The competitive environment and increased promotional activity in retail, specifically within the Kmart and Officeworks divisions, may pressure net margins as these divisions strive to retain market share.
  
• The ongoing investment in integrating recent acquisitions and transformation activities within the Health division may continue to weigh on profitability, impacting earnings in the near term.
  
• The Catch and OneDigital investments, while promising longer-term growth potential in digital and e-commerce, might continue to operate at a loss or not contribute significantly to earnings growth in the short term if they fail to scale quickly.

Wesfarmers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wesfarmers's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 6.6% in 3 years time.
• Analysts expect earnings to reach A$3.3 billion (and earnings per share of A$2.87) by about February 2028, up from A$2.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.3x on those 2028 earnings, down from 33.8x today. This future PE is lower than the current PE for the AU Multiline Retail industry at 28.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Wesfarmers Future Earnings Per Share Growth

Risks

• Strong operational execution amidst challenging market conditions led to a 3.7% increase in net profit and 9.9% rise in operating cash flows, suggesting continued financial resilience which could sustain profit margins.
  
• All major retailers under Wesfarmers, including Kmart with earnings growth of nearly 25%, demonstrated robust sales and earnings growth, indicating a stable revenue stream.
  
• The Kmart Group's enhanced sourcing capabilities and strategic pricing are fundamental strengths likely to support ongoing profitability.
  
• Bunnings' expansion in services like Bunnings Local Delivery and investment in smart home innovations suggest sustained consumer sales growth, positively affecting revenue and earnings.
  
• Wesfarmers' strategic focus on technology and digitization is contributing to productivity improvements and enhancing customer experiences, providing long-term financial benefits in efficiency and potentially increasing net margins.

Valuation

• The analysts have a consensus price target of A$66.126 for Wesfarmers based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$78.7, and the most bearish reporting a price target of just A$44.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$49.6 billion, earnings will come to A$3.3 billion, and it would be trading on a PE ratio of 28.3x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of A$76.24, the analyst price target of A$66.13 is 15.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.