Wesfarmers Ltd (ASX: WES) shares have climbed a hefty 30% so far this year, albeit with some ups and downs along the way.
After retreating from August highs of $77.20 apiece, shares have lifted almost 9% in the past month to trade at $74.36 at the time of writing.
Looking ahead, can this retail conglomerate use its diversified portfolio to drive growth in 2025? Let's see what the experts think.
Challenges and opportunities for Wesfarmers shares
The outlook for Wesfarmers shares in 2025 will be shaped by the company's specific business lines and the economic landscape.
Analysts remain divided on the consumer discretionary stock. Goldman Sachs rates it a hold, whereas the consensus rating by brokers is a sell, according to CommSec.
Goldman's concerns are on Wesfarmers' current valuation and potentially declining margins in Kmart.
But the broker also noted the earnings power of Bunnings, along with its other growth avenues, such as healthcare and lithium.
We continue to expect Bunnings to be trading strongly and gaining share in both DIY and Trade despite a more challenging operating backdrop, and we see multiple growth options for the business as previously illustrated in our deep dive note, including Lithium and WES Health as well as Bunnings Marketplace and Retail Media.
But Wesfarmers shares are trading in line with Goldman's range of valuation estimates at a price-to-earnings (P/E) ratio of 33x, leaving the broker neutral on valuation.
It values the stock at $69.50 apiece, citing the added downside risks from lower consumer spending and a weaker retail outlook.
And Goldman may be onto something there as well.
According to the Creditor Watch 2025 Business and Economic Outlook, the retailer could "remain under some pressure" next year.
The past 12 months although prices and turnover remain much higher than before COVID. Forward orders have declined, as has profitability and business conditions.
This reflects a combination of a higher cost of living, higher interest rates and likely the pull-forward of some demand during COVID lockdowns.
Discretionary spending volumes have even declined a little, despite very strong population growth, as consumers have tightened their wallets under the aforementioned pressures.
These issues could potentially clamp discretionary spending for consumers in Australia. This could impact Wesfarmers' retail brands, including Kmart and Target, according to PAC Partners.
But at the same time, Wesfarmers is a diversified conglomerate with many lines of business.
These include non-discretionary segments, such as its healthcare portfolio and its investments in lithium.
Core business is sound
Wesfarmers shares have been pushed higher in 2024 from performance in its key brands, including Bunnings.
The home improvements warehouse continues to shine with a return on capital of 69% in FY24. Analysts expect Bunnings to remain a growth driver for the business.
Its healthcare division includes the Priceline Pharmacy and Soul Pattinson Chemist brands and isn't overly sensitive to the business cycle.
And this could be a long-term driver for the company based on broad healthcare trends.
Fidelity International says that healthcare is a "notable structural driver" due to the ageing population. It estimates that the over-65 population will double by 2050.
Meanwhile, Wesfarmers has also entered the lithium market through its stake in Covalent Lithium, which provides interesting exposure to the battery materials sector.
Wesfarmers CEO Rob Scott says the company is focused on getting its hydroxide plant up and running by mid-2025.
Wesfarmers has forecast dividends of $1.98 per share for FY25, which will grow to $2.36 by FY26 at a compound annual growth rate (CAGR) of 9.2%.
Consensus estimates also project earnings to grow at a CAGR of 9.9% over this time as well.
Foolish takeaway
Like many in the retail space, Wesfarmers shares face a challenging year ahead. High interest rates and cost-of-living pressures are weighing on consumer spending.
However, its diversified portfolio and major investments in healthcare and lithium also provide the bedrock for a running stream of earnings growth.
Even with the challenges above, consensus estimates still project the business to grow its earnings and dividends at more than 9% per year to FY26.
Wesfarmers shares have climbed 38% in the past 12 months.
