Wesfarmers Ltd (ASX: WES) shares have had a good start to 2023, rising by over 10%.
Despite this solid start to the year, I believe the business has a very promising future and looks like a buy to me.
The ASX blue-chip share may not have a household name, but it owns many of the country's most recognisable retail brands – Bunnings, Kmart, Target, Officeworks and Priceline.
I believe that it is ASX shares that can keep delivering over a long period of time and produce good investment returns.
Wesfarmers can trace its origins back to 1914 as the Western Australian farmers' co-operative.
Image source: Getty Images
Strong-performing businesses
When we think about the types of products that Bunnings and Kmart sell, I think the categories that they sell will be in demand beyond the foreseeable future.
For me, Bunnings and Kmart are two of the best businesses in Australia. I think we can see this with the return on capital (ROC) that they achieve.
In the FY23 first half, Bunnings' ROC was 70.7% and it grew earnings before tax (EBT) by 1.5% to $1.28 billion. Kmart Group's ROC for HY23 was 43.3% and EBT jumped 114% to $475 million.
Kmart Group's profit saw a big jump substantially because of the fact that its stores were open during HY23, but saw trading affected by COVID restrictions in HY22.
The reason I'm highlighting the ROC is that it underlines how strong of a return Wesfarmers is making on money invested within its key businesses. As investors we want Wesfarmers to grow Bunnings, Kmart Group and so on because it makes such large returns. The group as a whole saw a return on equity (ROE) of 32.8% for HY23.
In HY23, Wesfarmers saw earnings per share (EPS) rise 14% to $1.22, while only declaring an interim dividend per share of 88 cents. This means it kept more than a quarter of its net profit after tax (NPAT) to re-invest for more long-term growth.
Long-term growth focused
I think the Wesfarmers share price and profit can improve quite consistently over the rest of this decade, which is why I believe that it would make such an effective investment for the long term.
Its existing operating businesses are doing quite well. But I think Wesfarmers has a good track record of changing its business portfolio to be future-focused.
For example, recent investments will "enable Wesfarmers to take advantage of growing consumer and industrial demand in the health and critical minerals sectors."
The business recently acquired health businesses Priceline and Clear Skincare Clinics. These names form the start of the new Wesfarmers Health division, which I think could turn into a much larger segment over time.
I also think that the Mt Holland lithium project is exciting for future earnings. In HY23, project development and construction activities continued, with first ore "mined and stockpiled" in December 2022. Wesfarmers noted about Mt Holland:
The project continues to be supported by favourable lithium market conditions and strong long-term demand for battery electric vehicles, and preliminary feasibility studies are underway to evaluate the opportunities of expanding the capacity of the lithium mine and concentrator.
In the next few years, I think lithium earnings can add a material amount to Wesfarmers' profit.
Over the coming years, I think Wesfarmers can continue to adjust its portfolio to wherever management thinks the opportunities are.
Wesfarmers share price valuation
According to Commsec, Wesfarmers shares are priced at around 20 times FY25's estimated earnings. Profit growth is expected to rise in each of the next few years.
I think that the ASX blue-chip share is one of the most likely to still be operating in the coming decades while making good profits. I'd happily buy it and hold for at least the rest of the decade.
