3 reasons why I think Wesfarmers shares are a buy after surging 21% in 2024

I believe Wesfarmers is one of the best stocks around for a few key reasons.

| More on:
Three happy shoppers.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Wesfarmers Ltd (ASX: WES) share price has been on an impressive run this year, climbing 21% in 2024 to date. However, some investors may be questioning whether the company is still good value.

I love seeing share prices rise because it means shareholders in a company are making money, which validates my positive views on the business.

However, it can be worrisome if a company's share price rises much faster than its profit because that leads to a higher price/earnings (P/E) ratio. This usually means the valuation has become less attractive.

If I were looking to buy Wesfarmers shares, I'd prefer to buy at the valuation a year ago when the share price was close to $50 than today. However, I think it would be a mistake to think we've seen the all-time high of Wesfarmers shares, and they won't go any higher. And remember, that old share price is history.

There are three key reasons why I believe the Wesfarmers share price is still a long-term opportunity.

Great businesses

An ASX share like Wesfarmers is not just a random ticker symbol. There is a solid business behind the WES ticker.

Wesfarmers owns several of what I consider some of the leading retail brands in Australia, including Bunnings, Kmart, Officeworks, Target, Catch, and Priceline.

Having these strong market positions makes these companies very appealing to customers and gives large companies various advantages, including buying power.

Wesfarmers is generating impressive returns on shareholder money that it retains and invests within the business. In FY24, it reported that it achieved a return on equity (ROE) of 31.3%, while Bunnings achieved a return on capital (ROC) of 69.2%, and Kmart Group saw an ROC of 65.7%.

Delivering those sorts of profitable returns within those businesses is very appealing, and I'd encourage Wesfarmers to keep investing if it can keep making that level of return on new investments within Bunnings and Kmart.

Investing for long-term success

Each year, Wesfarmers tells investors how it is investing across its various businesses. Some of its current focuses are improving productivity and costs, digitalising its sourcing, supply chain, and store operations, improving its e-commerce offering, expanding its product ranges, and so on.

The company continues to invest in growing its store networks and also makes bolt-on acquisitions, which can improve existing businesses or add a new growth avenue.

Some of its more recent acquisitions include Beaumont Tiles, Silk Laser Clinics and InstantScripts. I like Wesfarmers' initiative of growing in new sectors (such as healthcare) because of the diversification of earnings and how it unlocks other ways for Wesfarmers to make further acquisitions.

Winners keep on winning

Excellent businesses like Bunnings, Kmart, and Wesfarmers have shown strong performance over the last several years.

Good companies typically don't turn into terrible ones overnight. I believe Wesfarmers shares can keep on winning for many years ahead. Bunnings and Kmart pride themselves on offering customers great value, which I'd suggest is always an attractive feature for customers, particularly in the currently weak financial environment amid a high cost of living.

Keep in mind the quality of a business won't necessarily be apparent in the short-term performance of the (Wesfarmers) share price. It could fall 5% or 10% in the next few months, but in five years, I think it could have a higher underlying value.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Retail Shares

A happy young couple celebrate a win by jumping high above their new sofa.
Retail Shares

Overinvested in Wesfarmers shares? Here are two alternative ASX retail stocks

These stocks could complement an investment in Wesfarmers.

Read more »

Happy shopper at a clothes shop.
Retail Shares

The share price of this All Ords stock has jumped higher again. Here's why

Here's why Myer's share price is outperforming.

Read more »

A smiling woman at a hardware shop selects paint colours from a wall display.
Retail Shares

Wesfarmers shares recently hit a 52-week high. Can they go higher?

This business continues to impress investors.

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
Retail Shares

Would Warren Buffett buy Lovisa shares right now?

Is this a sparkly opportunity?

Read more »

Happy shopper at a clothes shop.
Earnings Results

Why did Myer shares just rocket 9%?

Investors are piling into Myer shares on Friday. But why?

Read more »

a thoughtful shopper with shopping bags wearing sparkly gold dress and matching shoes reclines on a chair with hand to chin in thought.
Retail Shares

Can Lovisa's new high profile CEO take Lovisa shares to new heights?

Is Lovisa about to embark on a new era of growth?

Read more »

A woman sits on sofa pondering a question.
Retail Shares

After soaring 244% in 5 years, how much further upside does Macquarie tip for Nick Scali shares?

The broker's expectations remain steady.

Read more »

Girl with make up and jewellery posing.
Retail Shares

Buying the dip: $5,000 invested in Lovisa shares a month ago is now worth…

It's been an outstanding first month for new Lovisa shareholders.

Read more »