Wesfarmers (ASX:WES) Ltd (ASX: WES) has demonstrated impressive performance over the past year, with its stock climbing 43%. This growth significantly outpaces the S&P/ASX 200 Index, which has increased by just 4.5% over the same period. As a notable ASX blue chip stock, Wesfarmers’ strong performance prompts a careful evaluation to determine if it continues to represent good value for investors.
A key factor to assess is the company's valuation. When a stock’s price rises faster than its earnings, the price-to-earnings (P/E) ratio increases, indicating the stock is trading at a higher multiple of its earnings and is relatively more expensive. Current projections suggest that Wesfarmers’ earnings per share (EPS) will be $2.26 for the 2024 financial year (FY24), resulting in a P/E ratio of 31x for FY24. This is notably higher compared to its historical averages, which have ranged from approximately 20 to 26 in recent years. Despite expectations that higher interest rates typically lead to lower P/E ratios, Wesfarmers’ current valuation does not reflect this trend.
Wesfarmers' portfolio includes several market-leading businesses, such as Bunnings, Kmart, and Officeworks. These entities contribute significantly to the company’s strong financial performance. In the first half of FY24, Bunnings achieved a return on capital (ROC) of 65.8%, Kmart Group realized 58.8%, and Officeworks 18.3%. Overall, Wesfarmers delivered a return on equity (ROE) of 31.4% for the same period, indicating effective use of shareholder money and suggesting that retained earnings could enhance future performance.
Looking ahead, the company’s earnings prospects for the 2025 financial year (FY25) appear promising. Forecasts suggest an 8% growth in EPS for FY25, which represents a solid growth rate for a large corporation. Both Kmart and Bunnings have been noted for gaining market share due to their appealing value offerings, which resonate well with budget-conscious consumers. Recent positive updates from other retailers, such as Universal Store Holdings Ltd, hint at an improving retail sector, which could be beneficial for Wesfarmers as well.
While Wesfarmers remains a strong and high-quality business with excellent prospects, its current valuation may not be as attractive as it was a year ago. Investors considering a stake in Wesfarmers might find it prudent to invest a portion of their funds now while monitoring for more favorable valuations in the future.