We delved into WES is detail last month here, at the time liking the stock enough to add it to our Hitlist – we wish we’d simply bought it at the time! It was interesting yesterday to see the retailer significantly outperforming the sector despite earnings being downgraded by 0.9% by Morgan Stanley, with the stock only slipping just -0.15%. The US investment bank turned more cautious on discretionary retail, downgrading the sector and most stocks under coverage, on concerns that a deeper housing slowdown will weigh on consumer spending.
- Morgan Stanley expects Australian house prices to fall 5–10% nationally, with housing turnover declining 20–30%, creating downside risk to FY27 earnings across the sector.
Lower house prices typically pressure consumer confidence and discretionary spending, while weaker turnover reduces demand linked to renovations, relocations and household fit-outs. This all seems logical to MM, and with Bunnings generating more than 40% of Wesfarmers’ revenue and even more of its earnings, the performance of its crown jewel, the dominant hardware and home improvement retailer, is critical.
However, history tells us a cooling housing market is a mild headwind for Bunnings, not an existential threat. The business has proven through multiple cycles that its revenue base is stickier than its housing market beta suggests. The bigger risk to WES overall is a deep consumer recession, but even then, Bunnings’ essential-goods positioning, trade relationships and pricing power make it one of the most resilient retail businesses on the ASX.
Despite the downgrade, we see WES as a strong-yielding defensive retailer which paid shareholder 4.59% fully franked over the last 12-months. If anything, further downgrades around the consumer could provide buying opportunities for investors. The stock has been by the best performing retailer on the ASX200, even though it’s slipped ~3%, and we can see this continuing into Christmas.
- We can see WES consolidating in the $76-80 region before taking another leg higher in the 2H.
MM is bullish towards WES around $79
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