On Friday, UBS downgraded Wesfarmers Ltd. (WES:AU) (OTC: WFAFF) stock, shifting its stance from Neutral to Sell. The firm has set a new price target for the stock at AUD66.00. The downgrade was influenced by the company's current valuation, which UBS considers to be high when compared to historical averages and its peers.
The analyst noted that Wesfarmers, known for its diverse portfolio and strong balance sheet, is well-equipped to navigate the current economic climate.
The company's strategy briefing day highlighted robust growth options across all divisions, and its positioning in value-based retail and critical industries is seen as favorable.
Despite these strengths, the firm's current share price suggests that its Bunnings division is being valued at a forward FY25 earnings multiple of 36 times price-to-earnings (P/E) and 25 times enterprise value to earnings before interest and taxes (EV/EBIT).
The UBS report pointed out that such high earnings multiples place Wesfarmers at a significant premium compared to the growth and outlook it can reasonably offer.
This premium, in the eyes of the analyst, does not justify the risks, especially given the possibility of earnings per share (EPS) downgrades. UBS has forecasted EPS figures below consensus expectations post the FY24 results, signaling potential negative catalysts ahead for the stock.
Investors reacted to the news from UBS, which suggests caution due to the risk of EPS downgrades and the unattractive risk-reward profile at the current valuation levels. Wesfarmers' share price will continue to be observed by the market as it responds to the firm's financial performance and broader economic factors.
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