We love a good sizzle of sausage, but is Bunnings owner Wesfarmers a good investment?

How are you: Wesfarmers is a $49 billion company and Australia’s largest private employer, with over 110,000 employees and operations across the country. Its shares took a hit in the latest market crash, plunging nearly 30% to around $43 in the past six months. However, the company has always been very successful due to the diversity of its activities.

Industry: Retail, healthcare, chemicals, industry, data.

Bunnings is a key income for the Wesfarmers conglomerate.

Main products: Consumer goods, pharmaceuticals, natural gas, ammonia, work clothes.

Key figures: Managing Director Rob Scott, President Michael Chaney.

The bull case: Much of the company’s bull case stems from its scale and diversification, with investors confident that the company has varied its operations enough to perform well in most economic circumstances.

“What you would hope for in any recovering economy is that there would be more spending in places like Bunnings as people do more home renovations,” said Jamie Hannah, deputy chief investment officer at Wesfarmers, the investor Van Eck.

[Wesfarmers is] Overweight Australia and Overweight Bunnings.

Van Eck Deputy Director of Investments Jamie Hannah.

“And on the other hand, if the economy slows down, that benefits Kmart, because it’s more discount stores, which are likely to see more spending.” Analysts agree with that assessment, with UBS’s Shaun Cousins ​​saying in early June that Bunnings and Kmart were well positioned in an inflationary environment.

Many of Wesfarmers’ retail divisions are also category killers, with Officeworks having little market competition and Bunnings retaining a 50% market share of home improvement space.

Investors also see significant upside in Wesfarmers’ chemical and industrial businesses, which benefit from rising commodity prices. The company’s new Mt Holland lithium project is also underway and expected to be operational by 2024, giving the conglomerate an additional boost due to high demand for the battery manufacturing element.

The bear case: One of the main disadvantages of Wesfarmers is its lack of diversification from a profit and revenue perspective.

Wesfarmers boss Rob Scott at Sydney's Fullerton Hotel during the company's strategy day.

Wesfarmers boss Rob Scott at Sydney’s Fullerton Hotel during the company’s strategy day.Credit:Brook Mitchell

In its half-year results in February, Bunnings posted a profit of $1.26 billion, or 70% of Wesfarmers’ total for the half. Similarly, the hardware chain’s revenue was $9.2 billion, more than half of Wesfarmers’ $17.7 billion in revenue for the period.

For Hannah, overexposure to Bunnings is a concern, as well as Wesfarmers’ reliance on the Australian market.

“Geographically, Wesfarmers generates 95% of its revenue in Australia,” he said. “On that side of things for diversification, they’re overweight Australia and overweight Bunnings.”

Analysts have also questioned the company’s moves into the digital space, with Wesfarmers’ new data and e-commerce division OneDigital expected to post losses of $180 million in fiscal years 2022 and 2023.

Barrenjoey analyst Tom Kierath recently told clients he was “struggling to understand the benefits” of Wesfarmers’ new $40 per year subscription service for OneDigital.

And, as is the case with many retailers, rising interest rates and inflation could dampen consumer spending, potentially reducing earnings from other major earners at Bunnings and Wesfarmers.

The long and the short take place every Wednesday

  • The advice given in this article is of a general nature and is not intended to influence readers’ decisions regarding investments or financial products. Before making financial decisions, they should always seek their own professional advice that takes into account their personal circumstances.

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