The Wesfarmers Ltd (ASX: WES) share price has jumped an impressive 15% in the past month, as the chart below shows. This has significantly outperformed the S&P/ASX 200 Index (ASX: XJO), which only increased by 2.4% in the last month.
Despite the big rise of Wesfarmers, the business could still deliver good long-term returns from here, in my view.
I think there are a few reasons why the business still looks attractive to me, despite its higher price/earnings (P/E) ratio.
Image source: Getty Images
Excellent businesses for the economic conditions
Wesfarmers is best known for owning a number of leading retailers including Bunnings, Kmart and Officeworks.
I view Bunnings and Kmart as two of the leaders of their respective areas of the retail world of hardware and general merchandising.
They have built a strong market share based on market-leading prices, offering great value. I think these businesses are well-positioned to continue serving Australian households during this period of higher inflation and elevated interest rates – just like they did a few years ago.
If there is an economic slowdown during FY27, Wesfarmers could benefit from a larger market share. The more scale Wesfarmers can achieve, the stronger its cost advantages will be for customers and the stronger its economic moat.
Its exposure to lithium mining could also be helpful following a large rise of the lithium price over the last year. Rising production from its lithium project should flow through to its earnings and cash flow.
Ongoing earnings diversification
Despite having a great earnings base already, the company is regularly looking for opportunities to expand the addressable markets of its businesses, which is helpful for a blue-chip to continue growing at a pleasing pace and not stagnate.
For example, Wesfarmers has opened five Anko stores in the Philippines and it plans to open five more Anko stores by the end of FY27.
Another example is that Bunnings has expanded its auto care and pet range, enabling to compete in two large retail categories.
A third example is how Kmart has opened a large K home store, which is a dedicated home and living products store with an expanded range. It could be a challenger to the IKEA model.
In the coming years, I expect the business to continue to add to its product ranges and even add entirely new businesses, which should be supportive over the long-term for the Wesfarmers share price.
Great margins
The margins of Kmart and Bunnings are extremely impressive and suggest to me how much money the business could generate on reinvested profit in the coming years.
In the FY26 half-year result, Wesfarmers reported that Bunnings Group generated a return on capital (ROC) of 70.8% and Kmart Group made a ROC of 69.8%. Considering the store networks of these businesses are growing, the future still looks very promising for Wesfarmers.
Its return on equity (ROE) is very good, in my opinion. In the HY26 result, the ROE excluding significant items was 32.7%, up from 31.2% in HY25. This means it's making great use of retained shareholder funds and it's becoming increasingly profitable.
Wesfarmers is a great business, though it's not the only ASX share that I think is a buy right now.
