Wesfarmers Ltd (ASX: WES) shares have hit another all-time high in early trading on Tuesday, currently swapping hands at $71.64 apiece.
The stock last traded at this level on 28 March, and it has since been trending lower. Despite no market-sensitive announcements, investors have bid up the price of the conglomerate.
More broadly, the benchmark S&P/ASX 200 Index (ASX: XJO) has rallied more than 2% in the past month, advancing 227 points since July.
With this milestone, what's next for Wesfarmers shares?
Evaluating Wesfarmers at its peak
The ASX retail conglomerate has climbed nearly 26% this year to date and has provided a more than 36% advantage over the S&P/ASX 200 Index (ASX: XJO) in the past twelve months.
Currently, Wesfarmers is trading at a price-earnings (P/E) ratio of 31 times. That means investors are paying $31 for every $1 of the company's earnings.
This is significantly higher than the general market and the historical averages for Wesfarmers shares.
For instance, the P/E ratio for the iShares Core S&P/ASX 200 ETF (ASX: IOZ) is currently around 19 times – a 38% discount to Wesfarmers.
As my colleague Kate recently reported, Wesfarmers' historical P/E range is 15 to 30 times. So it is priced at the upper end of this range.
The question is, why is there a high valuation multiple on Wesfarmers shares? Well, valuation multiples are partly based on expectations. And these expectations are usually driven by the underlying business.
Wesfarmers owns several market-leading brands, including Bunnings, Kmart, and Officeworks. These businesses have demonstrated persistently strong financial returns.
In the first half of FY24, Bunnings earned 66 cents for every dollar invested in its enterprise, equal to a 66% return on invested capital (ROIC).
Meanwhile, Kmart Group realised an ROIC of 58.8%, and Officeworks posted an ROIC of 18.3%.
Together, Kmart and Bunnings contributed around 66% of the Group's H1 FY24 revenues and approximately 80% of its earnings before interest and tax (EBIT).
The robust performance of these businesses could underscore why the market values Wesfarmers shares at such a multiple.
Wesfarmers shares prospects
On the upside, Wesfarmers' diversified portfolio spans the retail, industrial, and healthcare sectors. It is highly diversified, with many "essentials", such as pharmaceuticals. This could, in my view, provide a buffer against economic volatility.
The company is also investing in new growth areas, such as lithium mining and healthcare, which could offer additional revenue streams in the future. We will have to wait and see.
Analysts' ratings on Wesfarmers are generally mixed. In a May note, Goldman Sachs downgraded the share to hold, valuing it at $68 apiece.
Meanwhile, the consensus of analyst ratings says Wesfarmers shares are a hold, according to CommSec.
Foolish takeaway
While Wesfarmers shares are currently trading at a premium, the company's market position, diversified portfolio, and financial performance could justify this.
Whether Wesfarmers is suitable for your investment portfolio depends on your risk tolerance and personal financial circumstances. Always conduct your own due diligence.
