If I had $5k to invest today, would I buy Wesfarmers stock?

Is this a good value blue-chip share to buy?

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Wesfarmers Ltd (ASX: WES) stock has been a solid performer over the past year, climbing 43%. The retail conglomerate has significantly outperformed the S&P/ASX 200 Index (ASX: XJO), which has only risen by 4.5% in that same time period.

But after such a strong run, it's worth asking whether the company is good value or not.

If I were investing $5,000 today, I'd want to choose companies where I could benefit from both dividends and earnings growth, which would hopefully lead to a rising share price. Does Wesfarmers tick that box?

Wesfarmers stock is one I regularly like to praise as an investment opportunity.

Man sits smiling at a computer showing graphs.

Image source: Getty Images

Valuation

When a company's share price rises faster than its profit, it increases the price/earnings (P/E) ratio. This means the stock is trading at a higher multiple of its earnings and is more expensive.

The forecast on Commsec suggests Wesfarmers' earnings per share (EPS) has risen slightly to $2.26 in FY24.

If that projection proves true, then Wesfarmers stock is valued at 31x FY24's estimated earnings. This is much higher than in recent history. According to Commsec, the average Wesfarmers annual P/E ratio was approximately 22 in FY23, 26 in FY22 (when interest rates were close to 0%), 23 in FY21, 20 in FY20 and 20 in FY19.

Higher interest rates are meant to mean businesses trade at a lower P/E ratio, but that doesn't seem to be the case now for this ASX blue-chip share.

Strong businesses

I think some businesses are worth paying more for if they're high-quality and offer good growth potential.

Wesfarmers owns several market-leading businesses, including Bunnings, Kmart, and Officeworks. The strong market positions and large scale of these brands enable the ASX share to generate excellent financial returns.

In the first half of FY24, Bunnings achieved a return on capital (ROC) of 65.8%, Kmart Group realised 58.8%, and Officeworks 18.3%.

For the overall business, Wesfarmers delivered a return on equity (ROE) of 31.4% in HY24. That shows it's delivering good profit for the shareholder money retained within the business and suggests future retained earnings can be very beneficial for Wesfarmers stock.

We're already into the 2025 financial year, and, in my opinion, the company's earnings prospects look promising.

Firstly, the forecast on Commsec suggests Wesfarmers' EPS could grow 8% in FY25, which is a solid growth rate for such a large business. Kmart and Bunnings have reportedly been winning market share thanks to their value offerings, which appeal to cash-strapped households.

Recent updates from Aussie retailers have been promising and could suggest the clouds are lifting for the ASX retail sector. For example, Universal Store Holdings Ltd (ASX: UNI) recently advised that the FY24 fourth quarter was its best quarter of sales growth, and its sales growth in the first two weeks of FY25 was strong.

The same thing isn't necessarily happening for Wesfarmers, but I wouldn't be surprised if that's the case.

Foolish takeaway

Wesfarmers is a great business, but I certainly wouldn't call it cheap like it was a year ago. In my opinion, the quality of the underlying businesses and the company's long-term focus are likely to mean it keeps doing well over time.

If I had $5,000 to invest, I'd probably invest only $1,000 in Wesfarmers stock today and wait for a better valuation (or choose something else) with the other $4,000.

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.

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