Wesfarmers Ltd (ASX:WES) continues to assert its dominance in the retail sector, with its shares reaching new heights this week. The stock settled at an all-time high of AU$74.79 per share on Thursday, marking the highest closing price since the company's listing. This milestone underscores Wesfarmers' impressive performance, with the share price delivering a remarkable 31% return year-to-date and soaring over 50% in the past 12 months. This performance has significantly outpaced the S&P/ASX 200 Index (ASX:XJO), surpassing it by more than 39%.
As of the time of writing, Wesfarmers shares have climbed an additional 1.28%, trading at AU$75.74 apiece on Friday, leaving investors and analysts questioning whether anything can slow down this retail and industrial powerhouse.
The Driving Forces Behind Wesfarmers' Success
Wesfarmers has been one of the top-performing stocks on the ASX this year, driven by the strength of its iconic brands like Bunnings, Kmart, and Officeworks. The company’s share price has experienced a robust rally since the beginning of the year, fueled by the outstanding performance of its key businesses.
Bunnings and Kmart have been major contributors to this success. In the first half of FY24, Bunnings delivered an extraordinary return on invested capital (ROIC) of 66%, while Kmart achieved an impressive 58.8% ROIC. These figures indicate that for every dollar invested in these businesses, they are generating returns of 66 cents and 59 cents, respectively—figures that few investment funds can match.
In light of its strong profitability in the first half, Wesfarmers increased its dividend by 3.4% to 91 cents per share, further attracting investor interest. This combination of strong business performance and attractive shareholder returns has driven the surge in Wesfarmers shares throughout the year.
Valuation Concerns: Are Wesfarmers Shares Overvalued?
Despite the strong performance, there are growing concerns about whether Wesfarmers shares are becoming overvalued. The stock currently trades at a price-to-earnings (P/E) ratio of 33 times, which is nearly double the broader market's P/E of around 18.5 times. This premium valuation raises the question: Can Wesfarmers continue to deliver returns that justify such a high multiple?
Wesfarmers is actively investing in new growth areas, including lithium mining and healthcare, which are expected to provide additional revenue streams in the future. These ventures could potentially validate the current premium valuation, but investor expectations are already exceedingly high.
Analyst opinions are divided on the stock's future trajectory. Goldman Sachs (NYSE:GS) has rated Wesfarmers shares as a hold, with a price target of A$68, implying a potential downside of around 9%. In contrast, UBS is more optimistic, projecting that Wesfarmers could generate earnings of AU$2.26 per share in FY24, which at the current P/E ratio of 33 times, suggests a price target of AU$75 per share.
However, the risk lies in the potential contraction of the P/E multiple. For example, if Wesfarmers achieves consensus earnings of AU$2.40 per share in FY25, maintaining the current 33 times multiple would imply a price target of AU$79 per share. But if the multiple contracts to 30 times, the implied share price would drop to AU$72. This highlights the risk of 'overpaying' for shares, as there is no certainty about how the market will value Wesfarmers shares going forward.