Why has the Wesfarmers (WES) share price stalled?

Posted: 6 April 2022 12:23 pm
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Shares in the conglomerate have risen just 3% in the last month but stalled during today's trading.

Shares in conglomerate Wesfarmers (ASX: WES) have been going sideways for some time now. The Kmart and Bunnings owner has seen its stock drop 7% over the past year, while in the short-term, the stock is up 3% in the last month. On Wednesday again, Wesfarmers shares were down nearly 1% at $49.19, at the time of writing.

By comparison, rival Woolworths' (ASX: WOW) share price is up nearly 8% over the last month.

Why is the WES stock price under pressure?

Wednesday's drop in the Wesfarmers stock is likely a reaction to the news that the conglomerate has further sold down its stake in its one-time crown jewel supermarket giant Coles (ASX: COL).

Wesfarmers confirmed late on Tuesday it sold down nearly half of its minority interest in Coles, reducing its interest from 4.9% to 2.8%. The group has continued to sell down its stake in the supermarket since the business was spun off and listed in 2018.

The conglomerate had then retained a 15% stake and 2 years ago sold a 5.2% stake to raise around $1.1 billion. This week, it sold around 28.2 million shares at $17.75 each, representing a 1.8% discount to Coles' last traded price of $18.08 prior to the sale, netting around $500 million.

However, it could be good timing, with Morningstar announcing yesterday that it thought Coles' share price could be overvalued.

The sale comes just weeks after Wesfarmers' $764 million takeover of Australian Pharmaceutical Industries, which operates the Price­line chain of chemists, after seeing off rival Woolworths in a stiff bidding war.

Trading impact

The developments come at a time when Wesfarmers' Bunnings and Officeworks businesses have been under some pressure due to disrupted supply chains and higher costs because of the pandemic.

The conglomerate reported a nearly 13% drop in first half profit in February and operating cash flows dropped around 30% in the half year. This was largely because Bunnings' earnings dropped 1.3% and Officeworks earnings slid 18% amid major disruptions.

Kmart Group's earnings also plunged 63%, but this was because of temporary store closures due to COVID lockdowns and this should bounce back.

Meanwhile, the group has also been struggling to stem losses at its underperforming online marketplace Catch, prompting it to announce a restructure this week that will see the departure of current Catch managing director Pete Sauerborn at the end of June.

Wesfarmers' current struggles are reflected in analyst expectations as well. Broker Citi recently put a "neutral" rating on the stock with a price target of $50, while Morgan's has a more optimistic $58.50 a share forecast. That still implies limited upside for the stock in the current conditions.

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