The Wesfarmers Ltd (ASX: WES) share price recently hit a 52-week high of $84.35 last week on Wednesday. After such a strong rise, investors may be wondering if the company has more economic 'petrol' in the tank to keep driving higher.
A key part of a company's success is its ability to grow profit. By delivering growth, it can justify a higher valuation. But, delivering profit growth doesn't mean that the business is going to continue achieving 52-week highs in the short-term (or even in the longer-term), depending on whether rising earnings can be sustained.
So, is it possible that the owner of Bunnings, Kmart, Officeworks and other businesses can please shareholders even further? I'll share my thoughts on Wesfarmers.
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Earnings growth is expected
While Wesfarmers isn't delivering rocketing profit growth like an ASX tech share, it is consistently growing, which investors like to see.
For example, in the FY25 half-year result, Wesfarmers reported that its earnings per share (EPS) increased by 2.9% to $1.294.
The company also reported that Bunnings Group grew earnings by 3.1% to $1.32 billion, Kmart Group earnings increased 7.2% to $644 million, WesCEF (chemicals, energy and fertilisers) earnings rose 2.9% to $177 million and Officeworks earnings increased 1.2% to $87 million.
The question is – where could earnings go from here?
The forecast on Commsec suggests EPS could rise to $2.33 in FY25 and then increase 8.6% to $2.53 in FY26. This means the Wesfarmers share price is valued at more than 35x FY25's estimated earnings and around 33x FY26's estimated earnings.
To me, the short-term looks promising, but the longer-term looks even better.
I think the market is more willing to pay more for Wesfarmers shares because its earnings are becoming increasingly high-quality and the profit growth runway is lengthening.
I'm excited about the company's growth potential with Kmart's Anko products.
Strong Anko outlook
Wesfarmers recently pointed out that, globally, consumers are increasingly value-conscious, with higher income customers are trading down, placing importance on design aesthetic and quality at a lower price.
The ASX retail share said that Anko products are resonating with customers globally. Furniture and home products are being sold in Canada, wooden toys are being sold in the US and a broad general merchandise range is being sold in the Philippines in a few stores.
The company is targeting opening Anko-branded stores in markets with high growth in middle income households.
Kmart has already proven to be hugely successful in Australia. If Anko is successful in the Philippines (and other markets), then its earnings could grow significantly in the coming years.
Ongoing success for Bunnings?
I've been very impressed by Bunnings' ability to continue growing revenue during all conditions in the last few years. I don't think that was an accident – the business has provided customers with value and a large range of in-demand products.
The hardware retailer has a strategic growth plan to continue driving the business forward.
Wesfarmers says Bunnings has a "significant opportunity to drive sustainable sales and earnings growth over the long-term" by expanding and innovating its offer, growing and optimising its retail space, driving commercial growth, accelerating digital, data and retail media, and enhancing productivity through its entire operations.
Foolish takeaway
The Wesfarmers share price is as high as it has ever been, and it's not as cheap as it was on a price/earnings (P/E) ratio basis. But, the business has clear plans for its big profit generators of Bunnings and Kmart on how to grow its earnings from here and that makes me believe the Wesfarmers share price can continue to rise, possibly sooner rather than later. Falling interest rates could also help boost earnings and help justify a higher Wesfarmers share price.
