The Wesfarmers Ltd (ASX: WES) share price has been a strong performer in the last six months, rising over 20%. At such a high valuation, is it a buy?
Wesfarmers is the parent company of some of Australia’s leading retail businesses including Bunnings, Kmart, Officeworks, Priceline, Target and Catch. It also has a chemicals, energy and fertiliser business (WesCEF), which is working on a lithium project.
Reasons to wait
Retail spending is not an ultra-consistent industry, sometimes there are periods of weakness. The market recognises that potential for volatility, so the Wesfarmers share price usually suffers when the outlook seems rocky. That time can open up a buying opportunity.
I’m not trying to advocate for timing the entire share market, but it’s important to recognise that some industries and ASX shares go through more volatility than others. It’s also a good idea to note that Wesfarmers is at a high point with its price/earnings ratio (p/e ratio).
Using the forecast on CMC Markets, Wesfarmers shares are now valued at 26 times next year’s earnings.
We should remember that inflation is still too high for central banks to even think about cutting rates. In-fact, some market analysts think the next RBA rate move could be another increase. Not only could this economic environment hurt household spending, but it may also challenge stretched ASX share valuations.
Patience may be rewarded with a better Wesfarmers share price later this year.
Why the Wesfarmers share price could still be a buy
High-quality companies, such as Wesfarmers, have an incredible ability to continue delivering share price growth over the long-term. The market usually recognises that strength and prices them accordingly (higher than average companies).
Wesfarmers may be a bit pricey today, but I have a fairly high confidence the share price could be higher in five and ten years. What happens in the short-term may not be that important if the company’s long-term looks promising.
The company’s key profit generators of Bunnings and Kmart are excelling in this environment – consumers want good value products and those retailers are able to use their scale and product sourcing to deliver. Wesfarmers seems to be growing its market share.
I like the moves by the business to diversify its operations into lithium and healthcare, which seem to have long-term tailwinds thanks to Australia’s ageing population and the projected growth of electric vehicles.
Final thoughts on the Wesfarmers share price
I’d rate Wesfarmers as one of the best operators in Australia. It’s worth owning for the long-term in a portfolio.
I don’t think it’s a great time to buy, but I’d be willing to buy a small amount of shares today and then buy more on a pullback. Volatility happens often enough that there could be an opportunity to buy on a dip before the end of 2024. I also think it’s one of the leading ASX dividend shares around.
