The Wesfarmers Ltd (ASX: WES) share price is now trading at around $70 following a large rally in the past year, it’s up 33%. But is it a buy?
Wesfarmers is the parent company of a number of leading Australian businesses such as Bunnings, Kmart, Officeworks, Target, Priceline and plenty more.
Is the Wesfarmers share price a buy?
If a company rises rapidly, I’d hope to see profit growth to justify that sort of excitement.
The FY24 report was positive, but not amazing. Total revenue grew 1.5% to $44.2 billion, EBIT grew 3.3% to $4 billion and net profit after tax (NPAT) climbed 3.7% to $2.56 billion.
Is profit going to soar in FY25? Seemingly not, with the annual general meeting (AGM) update revealing that Bunnings, Kmart Group and Officeworks all achieved sales growth in the first few months of FY25, but not significant growth.
The health division is going through a useful transformation program, but it’s a relatively small part of the overall business.
E-commerce growth in the retail and health division has been “strong” and is benefiting from recent investments in its capabilities. However, e-commerce is only a small portion of Wesfarmers’ overall sales.
Investors should ask themselves the question – does the valuation make sense?
Is it an appealing investment?
According to CMC Markets, Wesfarmers is forecast to make profit / earnings per share (EPS) of $2.337 in FY25. At the latest Wesfarmers share price, the company is trading at a price/earnings ratio (p/e ratio) of 30x for the 2025 financial year.
I do think Wesfarmers can continue growing its profit for the long-term, but buying today gives investors a much smaller margin of safety to make good returns.
Over time, I expect Wesfarmers can continue growing profit. However, I think it’ll be hard for the business to grow profit as fast as it needs to with a p/e ratio of 30.
It may beat the ASX over the next decade, or next five years. But, the opportunity cost could be missing out on various other investments that are not priced so highly and/or could do better. If the Wesfarmers p/e ratio went back to 25 or below, I’d be much more interested, or if the company’s profit growth prospects picked up.
For now, there are a number of other ASX growth shares and ASX dividend shares I’d rather buy for my own portfolio.
