Up 34% in a year, is it too late to buy Wesfarmers shares?

The Wesfarmers Ltd (ASX: WES) share price has surged 34% over the past 12 months to close at $65.40 on Wednesday.

Shares in the retail conglomerate have soared despite challenging economic times as sticky inflation and high interest rates continue to take a toll on consumer spending.

Wesfarmers has outperformed other retailers over the same period, including Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL), which dropped by 16% and 7%, respectively.

So, is it too late to buy Wesfarmers shares?

Strong retail business

Wesfarmers owns a diversified portfolio of retail businesses, including Officeworks, Bunnings, and Kmart, which helps the company perform defensively through various economic cycles.

In the company's half-year FY2024 results announcement, Wesfarmers managing director Rob Scott highlighted:

Wesfarmers' retail divisions executed strongly during the half, responding effectively to changing customer needs as households increasingly sought out value.

In this environment, the retail divisions' core offer of everyday products with market-leading value credentials supported growth in sales and customer transaction numbers.

Weak lithium prices add pressure

While its retail business is going strong, its lithium project is affected by weak global commodity prices.

Wesfarmers is investing in a lithium mining project at Mt Holland, which is in the ramp-up stage. The project's profitability largely depends on fluctuations in global commodity prices and foreign exchange rates.

Unfortunately, the lithium price plummeted last year, falling 67% from US$45,000 per tonne of lithium carbonate to approximately US$14,500 per tonne today. As my colleague Bronwyn noted here, the outlook remains uncertain as the global lithium price is closely tied to the demand for electric vehicles.

Wesfarmers acknowledged these challenges. In the half-year results briefing, Scott added:

Strong operating performance continued in WesCEF, with good plant availability and production rates during the period. As previously indicated, earnings for the half were impacted by lower global commodity prices relative to the elevated pricing environment over recent years.

The Mt Holland concentrator was successfully commissioned during the half, and operations recently entered the ramp-up phase. Good progress continued on the construction of the Kwinana lithium hydroxide refinery.

How cheap are Wesfarmers shares now?

Wesfarmers shares are trading at 27 times FY24's estimated earnings, which is at the high end of its historical trading range of 15 to 30 times. The company offers a fully-franked dividend yield of 3%.

Comparing Wesfarmers to its peers, based on earnings estimates provided by S&P Capital IQ:

• Woolworths shares are valued at 22x FY24's estimated earnings.
• Coles shares are valued at 26x FY24's estimated earnings.

The outperformance of Wesfarmers compared to its peers prompted Goldman Sachs to downgrade the consumer discretionary stock in favour of staples recently. In this downgrade report summarised by my colleague Bronwyn, Goldman Sachs analysts Lisa Deng and James Leigh highlighted:

… our Buy thesis of resilient retail (Bunning and Kmart) businesses generating ~A$2.0-A$2.5 billion free cashflow to invest behind growth opportunities (Digital and Health) is now fully factored in.

Foolish takeaway

Wesfarmers owns several high-quality retailers with strong customer loyalty. It also invests in diverse industries, including healthcare, chemicals, and industrial businesses.

However, its current valuation isn't cheap relative to its history, making this a tricky investment decision.

While the Wesfarmers share price may not be a bargain, the company has been an excellent dividend payer over the years. At the current price, Wesfarmers offers a fully franked dividend yield of 3%.

I think it might still be worth considering for long-term dividend investors.