Wesfarmers Ltd (ASX: WES) shares are very popular amongst ASX investors.
Wesfarmers is one of Australia's largest and most well-known retailers, with brands like Kmart, Bunnings, Officeworks, and Target in its portfolio.
These are places that everyday Australians shop at and see doing well. Many of these stores are often packed with customers, especially around the holiday season.
It's therefore understandable that many Australians may see Wesfarmers shares as a solid investment.
That perception is also backed by Wesfarmers shares' long-term track record. The company is up more than 100% over the past 5 years, not including dividends paid along the way. Wesfarmers currently offers a moderate dividend yield of 2.24%.
That kind of return is high enough to please just about any investor.
But what does the future look like? According to JP Morgan Chase & Co (NYSE: JPM), it is not as appealing.
Last month, the investment bank released a research note on Wesfarmers shares, rating the stock as underweight.
Let's find out what was behind this rating.
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All about the valuation
In its 27 August research note, JP Morgan commended Wesfarmers for delivering a high-quality FY25 result and solid trading update.
JP Morgan said Bunnings and Kmart continue to deliver earnings growth, underpinning mid-single digit group earnings per share (EPS), a strong balance sheet, and cash flow generation.
The investment bank said this reinforced its premium valuation. Wesfarmers shares currently trade at around 36 times earnings.
Commenting on its rating and price target, JP Morgan said:
We continue to see this valuation as excessive, but also fail to see any catalysts to drive a de-rate back to what we consider a fair multiple (~27x PER at our $73.00 target price). If Bunnings and Kmart continue to deliver mid to high single digit growth (which we expect), Wesfarmers is likely to remain well held in what has been a highly volatile market backdrop. Following minor EPS revisions (-0.4% in FY26 and -0.2% in FY27) we increase our price target from $70.00 to $73.00, maintaining our Underweight rating.
Keep an eye on the macro
As a consumer discretionary business, Wesfarmers shares are economically sensitive.
JP Morgan also acknowledged that a rebound in discretionary spending due to an improved macroeconomic outlook, including the outlook for housing, could result in positive upside.
With further interest rate cuts projected this year, it's possible that Wesfarmers shares could benefit.
Today's interest rate decision by the Reserve Bank of Australia (RBA) could provide insight into the likely future pathway for rate cuts for the remainder of 2025.
