Here is a number worth sitting with.
In a year when the ASX 200 rose 7%, Wesfarmers Ltd (ASX: WES) shares fell 9%.
That gap has a lot to do with the stock's valuation coming back to earth after the it traded at 37 times forward earnings in mid-2025.
Today it trades at around 28.5 times earnings, and Morgans just upgraded it to accumulate.
Here's why investors should take a closer look at Wesfarmers shares.
Image source: Getty Images
The half-year result was strong
Wesfarmers posted NPAT of $1,603 million for the half year ended December 2025, up 9.3% on the prior year.
Free cash flows surged 35.6% to $2,745 million. Bunnings revenue rose 4% to $10.7 billion.
Kmart Group delivered 3.2% growth to $6.4 billion. The interim dividend lifted 7.4% to $1.02 per share, fully franked.
Managing director Rob Scott said:
Wesfarmers' increase in profit was supported by strong earnings contributions from our largest divisions – Bunnings, Kmart Group and WesCEF.
Sales momentum has continued into the second half, with Bunnings, Officeworks, and Kmart all delivering further growth.
Lithium is turning from a cost to a contributor
Most investors know Wesfarmers for Bunnings and Kmart, yet few know it is also one of Australia's most significant lithium producers.
In 2019, Wesfarmers paid $776 million to acquire a 50% stake in the Mt Holland lithium project in Western Australia, forming the Covalent Lithium joint venture with Chilean mining giant SQM.
The project includes one of the largest known lithium deposits in the world and a downstream refinery in Kwinana designed to produce battery-grade lithium hydroxide for electric vehicle manufacturers.
For two years, the joint venture drained cash as construction costs mounted.
Now, with lithium prices up approximately 60% year to date in 2026, lithium could substantially contribute to Wesfarmers' bottom line.
This asset adds great earnings optionality to a business that already generates enormous cash from its retail divisions.
It is a free call option that few investors are pricing in right now.
What Morgans said
Brokers seem to be equally bullish.
Morgans upgraded Wesfarmers shares to accumulate this week with an $81.10 price target.
The broker said:
WES's share price has fallen 9% over the past 12 months and 7% over the past 6 months. The stock is now trading on a more reasonable 26.5x FY27F PE compared to a peak one-year forward multiple of ~37x in August 2025. Our target price increases slightly to $81.10 and with a forecast 12-month TSR of 12%, we upgrade our rating to ACCUMULATE. In our view, WES remains a high-quality business with a healthy balance sheet and a proven management team.
The risks
However, Wesfarmers is not immune to a consumer slowdown.
Kmart and Bunnings both rely on Australians spending money at home.
If the RBA's rate hiking cycle weighs on household budgets more than expected, volumes could soften.
The stock is also not cheap in absolute terms at around 28.5 times earnings.
Foolish takeaway
Wesfarmers shares have rarely been available at a more reasonable price relative to the quality of the business.
Bunnings and Kmart keep growing.
Lithium is starting to contribute, and the stock's dividend keeps rising.
For long-term investors, the pullback in Wesfarmers shares may look more like an entry point than a warning sign.
