Is the Wesfarmers share price facing 'significant downside risk'?

Wesfarmers Ltd (ASX: WES) shares have enjoyed a year of strong outperformance.

Shares the S&P/ASX 200 Index (ASX: XJO) retailer – whose subsidiaries include household names like Bunnings Warehouse, Kmart Australia, Officeworks and Priceline – closed yesterday trading for $73.26. That sees the stock up just under 39% over 12 months.

That's more than twice the 18% returns delivered by the ASX 200 over this same period.

And this strong performance doesn't include the two fully franked dividends Wesfarmers shares delivered over the full year, which totalled $1.98 a share.

If we add those back in, then we'll see the stock's accumulated value has rocketed just under 43% since this time last year.

But with earnings growing slower than the company's share price, the price-to-earnings (P/E) ratio has climbed to around 32 times.

And with current cost of living pressures showing few signs of rapidly abating, this raises a red flag for PAC Partners' James Nicolaou (courtesy of The Bull).

Time to take profits on Wesfarmers shares?

"This diversified industrial conglomerate generated revenue of $44.189 billion in fiscal year 2024, up 1.5% on the prior corresponding period," said Nicolaou, who has a sell recommendation on Wesfarmers shares.

Explaining his bearishness, Nicolaou added:

Moving forward we believe the company faces challenges in an economy of high interest rates, inflationary pressures and soaring cost of living expenses. Consequently, we believe the company is exposed to significant downside risk.

As for the valuation following the big share price gains of the past year, he said, "The company's price/earnings ratio and earnings per share valuation were recently above the historical average."

Indeed, the ASX 200 retail stock gained 8% in just 17 trading days last month.

"Wesfarmers shares have risen from $66.64 on November 5 to trade at $72 on November 28," Nicolaou said. "It may be prudent to consider taking some profits."

What else did the company report for FY 2024?

Wesfarmers shares were in the spotlight when the company reported its full fiscal year 2024 results on 29 August.

Atop the revenue bump Nicolaou mentioned, earnings before interest and tax (EBIT) were up 3.3% from FY 2023 to $3.9 billion. And net profit increased by 3.7% to $2.56 billion.

Income investors were treated to a sweetened dividend of $1.07 a share, fully franked. Eligible shareholders will have received that payout on 9 October.

With a nod to the challenging conditions facing the retail conglomerate, Wesfarmers managing director Rob Scott said at the time:

We expected a challenging year and there were numerous headwinds to navigate with cost of living pressures, rising costs of doing business, subdued activity in residential construction and significant volatility in key commodities.

Wesfarmers shares dropped 4.1% on the day the company reported.

The post Is the Wesfarmers share price facing 'significant downside risk'? appeared first on The Motley Fool Australia.

Motley Fool contributor Bernd Struben 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 Wesfarmers. The Motley Fool Australia 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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