The Wesfarmers Ltd (ASX: WES) share price has done well over the long term, rising by 55% in the past five years, as we can see on the chart below. I think it's an attractive time to invest in the stock and own it for the next decade.
Wesfarmers is not exactly a household name, though many of the businesses that it operates are national leaders, including Bunnings, Kmart and Officeworks.
The Wesfarmers share price has dropped by more than 20% since its peak in August 2021. I think the current valuation is appealing for the following reasons.
Good earnings multiple
One of the most important elements of deciding if a business is good value or not is considering its price/earnings (P/E) ratio.
There are many different ways to look at a business, and I think the earnings multiple tells us a lot for a stable, profitable and growing business like Wesfarmers.
FY23 is nearly over, so I think it's worthwhile to look at the FY24 profit projection. The Commsec earnings per share (EPS) forecast for FY24 is $2.25. This would put the current Wesfarmers share price at less than 23 times FY24's estimated earnings.
That seems like a very reasonable valuation to me, considering the profit is projected to keep growing in FY25 as well.
The quality of Wesfarmers' businesses really shows with the profit it makes on its investments and retained capital. In the FY23 half-year result, Wesfarmers achieved a return on equity (ROE) of 32.8%, with Bunnings achieving a return on capital (ROC) of 70.7%, Kmart Group seeing a ROC of 43.3% and Wesfarmers chemicals, energy and fertilisers (WesCEF) generating a ROC of 23%.
Those ROC and ROE numbers suggest that the business is very effective at putting retained profit to good use.
More profit generation to come online
Wesfarmers has an impressive group of currently-operating businesses. But, the company has initiatives in the works that could soon unlock more profit.
Share prices often follow profit over time, so the growth in profit I'm about to outline could be a useful boost for the Wesfarmers share price in the medium term.
The main growth of profit that could be unlocked in the next couple of years is the Mt Holland lithium project. One expert has suggested that this could unlock over $1 billion in annual earnings for the company.
The first production from the Mt Holland concentrator is expected late in the 2023 calendar year, while first production from Kwinana refinery is expected in the first half of the 2025 calendar year.
There are further lithium growth opportunities with expansion of the Mt Holland mine and concentrator, expansion of the Kwinana refinery and exploration of other Mt Holland tenements, as well as critical mineral exploration outside of Mt Holland.
Wesfarmers is also trying to acquire the Silk Laser Australia Ltd (ASX: SLA) business, though it's facing competition from EC Healthcare. If Wesfarmers does buy Silk Laser, it would diversify and grow the healthcare division.
Long-term growth plans
The ASX share has proven that it is long-term focused with how successfully the Wesfarmers share price has done over the prior decades.
Wesfarmers is trying to grow all of its divisions. With Bunnings, the key profit driver, it's focused on profitable growth and it's aiming to increase market participation in areas like commercial and online. New acquisitions, namely Tool Kit Depot and Beaumont Tiles, can help grow Bunnings' earnings.
Many areas of the Wesfarmers business can benefit from the growth of the Australian population, with divisions such as Kmart Group having more potential customers.
I'm very intrigued by the new healthcare division, which will include areas like beauty and well-being. Wesfarmers says this division is exposed to "structural growth", which can benefit from the ageing population – the population aged 65% will reportedly double to 8.9 million by 2061.
Wesfarmers is planning to leverage its group capabilities to help boost the healthcare division. It has also talked about using data and digital technology to help improve health outcomes, so I wouldn't be surprised to see the company grow in the healthcare technology space.
