The Wesfarmers Ltd (ASX: WES) share price has drifted lower in recent weeks. I think this makes the business a compelling buy for several reasons.
Wesfarmers is not exactly a household name, but the company is the owner of several recognisable businesses including Bunnings, Kmart, Officeworks, Target and Priceline.
The company has a healthcare division and a chemicals, energy and fertiliser division called WesCEF.
Image source: Getty Images
Regular earnings compounding
It's my belief that the best businesses to own over the long term are those that can significantly grow earnings.
That doesn't mean they need to grow profit by 25% per year. Instead, growing at a solid rate can make a big difference over several years. For example, if earnings grow at a compound annual growth rate (CAGR) of 8%, they double in nine years.
We don't know exactly how Wesfarmers will perform, but it has a track record of compounding earnings at a solid pace over the past few years.
In the 2026 financial year, the company reported that its underlying earnings per share (EPS) grew 8.3%, driven by 3.4% revenue growth, despite difficult trading conditions.
I think the quality of the Kmart and Bunnings businesses will allow Wesfarmers to continue earnings growth at a good single-digit pace in the coming years.
The business reported that its return on equity (ROE) (excluding significant items) improved by 4.3 percentage points to 35.5% in FY26, showing that the business usually generates a great return on additional money invested in the company.
I think Kmart Group and Bunnings Group can continue to generate returns on capital (ROC) of around 70% going forward, which is another strong signal of future profit growth for Wesfarmers.
Rising profits are a great tailwind for the Wesfarmers share price over time.
Well-suited to succeed during high cost of living
Customers always want good prices for the products they buy. Kmart and Bunnings are considered leaders in their respective retail categories.
Australia is facing a high cost of living for the foreseeable future – I think this period will be an opportunity for Wesfarmers to capture further market share with the perceived lowest prices.
I like how Wesfarmers, particularly Bunnings, is working on expanding into new product categories, which increases its addressable market. Two of the latest areas of focus were pet care and auto care.
In the coming years, I reckon Wesfarmers will be able to improve its profit margins thanks to strong operating leverage, despite offering customers such low prices.
It's possible that financial growth could accelerate during this period, rather than seeing a slowdown.
Better valuation of the Wesfarmers share price
The Wesfarmers share price is down 21% since July 2026, which is a significant and rapid drop. I think that makes it an appealing long-term buy, especially given how Wesfarmers continues to invest in new growth avenues like healthcare and lithium mining.
According to CommSec's projection, Wesfarmers' share price is valued at 27x FY27's estimated earnings.
