The Wesfarmers Ltd (ASX: WES) share price has been on an impressive run this year, climbing 21% in 2024 to date. However, some investors may be questioning whether the company is still good value.
I love seeing share prices rise because it means shareholders in a company are making money, which validates my positive views on the business.
However, it can be worrisome if a company's share price rises much faster than its profit because that leads to a higher price/earnings (P/E) ratio. This usually means the valuation has become less attractive.
If I were looking to buy Wesfarmers shares, I'd prefer to buy at the valuation a year ago when the share price was close to $50 than today. However, I think it would be a mistake to think we've seen the all-time high of Wesfarmers shares, and they won't go any higher. And remember, that old share price is history.
There are three key reasons why I believe the Wesfarmers share price is still a long-term opportunity.
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Great businesses
An ASX share like Wesfarmers is not just a random ticker symbol. There is a solid business behind the WES ticker.
Wesfarmers owns several of what I consider some of the leading retail brands in Australia, including Bunnings, Kmart, Officeworks, Target, Catch, and Priceline.
Having these strong market positions makes these companies very appealing to customers and gives large companies various advantages, including buying power.
Wesfarmers is generating impressive returns on shareholder money that it retains and invests within the business. In FY24, it reported that it achieved a return on equity (ROE) of 31.3%, while Bunnings achieved a return on capital (ROC) of 69.2%, and Kmart Group saw an ROC of 65.7%.
Delivering those sorts of profitable returns within those businesses is very appealing, and I'd encourage Wesfarmers to keep investing if it can keep making that level of return on new investments within Bunnings and Kmart.
Investing for long-term success
Each year, Wesfarmers tells investors how it is investing across its various businesses. Some of its current focuses are improving productivity and costs, digitalising its sourcing, supply chain, and store operations, improving its e-commerce offering, expanding its product ranges, and so on.
The company continues to invest in growing its store networks and also makes bolt-on acquisitions, which can improve existing businesses or add a new growth avenue.
Some of its more recent acquisitions include Beaumont Tiles, Silk Laser Clinics and InstantScripts. I like Wesfarmers' initiative of growing in new sectors (such as healthcare) because of the diversification of earnings and how it unlocks other ways for Wesfarmers to make further acquisitions.
Winners keep on winning
Excellent businesses like Bunnings, Kmart, and Wesfarmers have shown strong performance over the last several years.
Good companies typically don't turn into terrible ones overnight. I believe Wesfarmers shares can keep on winning for many years ahead. Bunnings and Kmart pride themselves on offering customers great value, which I'd suggest is always an attractive feature for customers, particularly in the currently weak financial environment amid a high cost of living.
Keep in mind the quality of a business won't necessarily be apparent in the short-term performance of the (Wesfarmers) share price. It could fall 5% or 10% in the next few months, but in five years, I think it could have a higher underlying value.
