Wesfarmers Ltd (ASX: WES) shares have hit yet another record high this week.
The stock settled at $74.79 per share on Thursday, its all-time high based on closing prices. In other words, if you look at the closing price every day since Wesfarmers listed, this is the highest price ever.
That brings the Wesfarmers share price return to 31% year to date and more than 50% over the past 12 months, outpacing the S&P/ASX 200 index (ASX: XJO) by more than 39%.
At the time of writing, the stock has climbed another 0.6%, trading at $75.28 and raising the question: Can anything stop this retail and industrial giant?
Let's see whether the experts think Wesfarmers shares remain a buy.
Wesfarmers powers ahead
Wesfarmers has been a top performer on the ASX this year. The company, which owns iconic brands like Bunnings, Kmart, and Officeworks, has seen its share price rally hard since January.
Bunnings and Kmart are two of the major driving forces behind this success. In the first half of FY24, Bunnings delivered a remarkable 66% return on invested capital (ROIC), while Kmart achieved an impressive 58.8% ROIC.
What this means, is that every dollar that's been invested into these businesses (to grow their assets) is returning 66 cents and 59 cents, respectively. Not too many fundies can match this return.
Given the profits it earned in H1, Wesfarmers increased its dividend by 3.4% to 91 cents per share.
These – and other moves – have seen investors piling into Wesfarmers shares this year.
Are Wesfarmers shares overvalued?
At a price-to-earnings (P/E) ratio of 33 times, Wesfarmers shares trade at a premium compared to the broader market's P/E of around 18.5 times.
This is pricey – almost double the market's multiple. But is Wesfarmers expected to produce double the returns as well?
Wesfarmers is investing heavily in new growth areas such as lithium mining and healthcare, which are expected to provide additional revenue streams.
These ventures could justify the current premium valuation, but investor expectations are already sky-high.
Broker opinions are mixed. Goldman Sachs has rated Wesfarmers shares as a hold, setting a price target of $68. This implies a potential 9% downside.
On the other hand, UBS is more optimistic, projecting that Wesfarmers could generate $2.26 per share in earnings for FY24.
At the P/E of 33 times, this implies a price target of $75 per share.
The risk is if investors stop paying this multiple. For example, according to CommSec, consensus estimates project around $2.40 in earnings per share (EPS) from Wesfarmers in FY25.
At the 33 times multiple, this implies a price target of $79 per share (33 x $2.40 = $79).
But if this multiple contracts, to say, 30 times, the implied share price reduces to $72 (30 x $2.40 = $72).
This is the risk in 'overpaying' for shares in the first place. However, there is no saying what the P/E multiple on Wesfarmers shares will do from here.
Foolish takeaway
Wesfarmers shares continue to soar. While the current valuation may seem high, the company's diversified portfolio and strong financial performance could support the premium.
For long-term investors, Wesfarmers' leading brands and strategic investments are standouts, in my opinion.
