Broker Watch

Goldman Sachs tips Wesfarmers for highest growth among top ASX 200 consumer stocks

Fri 24 Jan 25, 2:23pm (AEDT)
Bunnings Retail WES Wesfarmers
Source: iStock

Key Points

  • Wesfarmers upgraded to Buy by Goldman Sachs, citing growth drivers like Bunnings, lithium, and health, with a target price raised 13.2% to $78.70
  • Bunnings poised for market share gains, leveraging resilient DIY trends, store optimization, and category expansion, expected to outperform broader industry growth in FY25
  • Earnings growth to accelerate, with Goldman forecasting Wesfarmers' EPS CAGR of 10% (FY24-27), the highest among ASX 200 consumer stocks, driven by portfolio diversification and operational efficiency

Wesfarmers (ASX: WES) delivered a standout performance in 2024, with its shares up 25.4% (or 29.1% including dividends). However, with earnings growing just 3.7% in FY24, the stock is now trading at its highest valuation since July 2021.

Despite trading at a price-to-earnings multiple of 32x — relatively high for a retailer — Goldman Sachs sees 'new drivers of growth in Wesfarmers to drive both earnings and valuation upside.

The investment bank upgraded the stock to a Buy (from Neutral) and raised its target price by 13.2% to $78.70.

Three Key Earnings Drivers for Growth

Bunnings to gain market share despite softening operating environment. The latest housing market data shows that new build starts remain weak, but total dwelling transfers (including second-hand properties) and renovation approvals appear more resilient. This trend suggests the DIY segment of home improvement, including restoration and repairs, is more defensive than the commercial side. This dynamic is favorable for Bunnings, which has a 60/40 split between DIY and commercial exposure, according to Goldman.

Bunnings' strategy further strengthens its market position. Key initiatives include optimising its store space (~10% growth over five years), expanding into high-demand categories like cleaning and pet supplies, and building out specialised services to capture more of the commercial market. These efforts are expected to drive market share gains across the sector.

The analysts expect Bunnings to deliver 2.6% sales growth and 1.3% EBIT growth for the first-half of FY25, outperforming the broader home improvement industry's growth of 1.0% and Metcash's 2.9% decline (Apr-Oct 2024).

Long-term adjacent growth opportunities available for Bunnings sales and margins. "There's clear potential in expanding certain product lines," says Goldman, pointing to untapped opportunities in appliances and professional tools. Bunnings is already taking strategic steps, restructuring tool sections in approximately 50 stores to attract professional customers and broaden its professional tool range. The retailer has shown initial success in emerging categories like cleaning and pet products, with management signaling plans to further expand into auto accessories.

These strategic moves should help the company bridge the sales-per-square-meter gap with international competitors like Home Depot, which generates approximately $9,300 per square metre vs. Bunnings' $4,700.

Bunnings is breaking new ground with its digital presence, as website traffic now surpasses Woolworths' Australian Food division with 20.4 million monthly visits, along with a notable increase in app downloads.

New portfolio segments, such as lithium and health, are expected to drive double-digit EBIT growth in FY26-27. Goldman expects these two levers to start delivering positive sales and EBIT contributions from FY26-27.

The Kidman Lithium project is forecast to achieve profitability for the first time, shifting from a $39 million loss to a $116 million operating profit—a $155 million improvement. Wesfarmers Health is forecast to contribute an additional $36 million in profit, while the closure of Catch is estimated to reduce losses by $51 million.

The Highest Growth

Alongside solid growth from Bunnings and Kmart, Wesfarmers is positioned for accelerated earnings growth, with Goldman Sachs projecting an increase from 3.1% in FY25 to 13.5% in FY26 and 12.4% in FY27.

Goldman projects Wesfarmers will deliver a '10% EPS CAGR between FY24-27, the highest among the top five consumer companies in our coverage.' The company is also expected to lead in ROIC expansion, increasing from 20% to 25%, outpacing peers like Woolworths, Coles, Endeavour Group, and JB Hi-Fi."

 

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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