Investors who follow Wesfarmers Ltd (ASX: WES), will know that the company and management team are held in high regard for the shareholder value that has been created.
Much of this praise is quite justified, with the share price gains alone (since the beginning of 2000) blitzing the returns from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). Over that fourteen and a half year time frame, the stock price has gained 240%, compared with a return of 76%, from the index.
On closer inspection though, the praise for the company needs to be tempered. Over both the past 10 years and last 12 months, the return from Wesfarmers' shares (excluding dividends) has trailed the index – but not by much. As this article rightly draws readers' attention to, the high multiple that Wesfarmers' stock still trades on, appears to be out of whack with the underlying performance of the firm!
With the stock trading on a forward multiple of 21, investors are already paying a premium for quality and growth. Given Wesfarmers has a market capitalisation of $56 billion and already commands massive market share from its retail assets, it is reasonable to suspect that the company will struggle to grow earnings in the future, at a rate much faster than inflation. Couple this with the high share price and the potential for outperformance from this point, appears a tough ask.
In a fully priced market, expensive blue chips are not the place to be looking for investment opportunities.
