Wesfarmers Ltd (WES) $69.83

Market stalwart WES is the 7^th largest company on the ASX, and like many others, it has been trading on a very rich valuation over the past six months. However, the stock’s recent ~13% correction has alleviated some of this condition, although it remains on the expensive side relative to its own history. The stock was driven higher as a result of its own success, with management continuing to deliver. However, the same two questions must be asked: is the company well-positioned moving forward, and if so, what is an attractive level to buy?

Firstly, let’s look at the 1H result delivered in late February:

• Well-known operators Bunnings, Officeworks, and Kmart continue to perform strongly with improving margins, i.e. over 75% of the group’s revenue.
• Returns from Wesfarmers health and lithium business struggled, although we may have seen the worst in both segments.
• The Group will benefit in FY26 from the wind-down of its online marketplace and e-commerce business Catch.

The quality of this diversified business was evident in its report despite ongoing cost pressures. This solid result, as the market expects from WES, demonstrated why we see significant opportunities for further long-term earnings growth. However, valuation remains an issue with the P/E still rich, and we would become more positive on a deeper pullback nearer the $65 area; given the operational strength of the business, it may be a significant ask.

• WES is a solid business with valuation as our primary focus; the stock has already retraced over 10% three times in the last year, suggesting little to no upside above $75 in the foreseeable future.

Potential growth areas for WES include retail media, where an additional revenue stream can be generated from advertising partnerships, and Anko Global Wholesale (Kmart Group), which sells Kmart’s private-label products (branded as Anko) to international retailers. Both are exciting because they come with limited operational and cost risks. WES enjoys a healthy balance sheet and an experienced leadership team. Moving forward, the company’s retail businesses are well positioned for when consumers become more confident, hopefully, aided by a couple of interest rate cuts.

• WES is a good company with a proven track record of delivering long-term value for shareholders. However, trading at 29.9x FY26 Est and a 2.9% yield, we view the valuation as full, around $70.
• P/E expansion appears to be the stock’s best hope over the next 12 months, which doesn’t excite us from a risk/reward perspective.