Wesfarmers: Despite Above-Market Revenue Opportunities Shares Are Materially Overvalued

Like Morningstar, wide-moat Wesfarmers sees abundant sales growth opportunities in the core Bunnings business. There is also room to cut costs, in turn supporting operating margins and reinforcing its low-price value proposition. In its second-largest segment, Kmart, there are blue-sky opportunities to generate export sales with its private-label Anko brand, but any earnings are likely to be immaterial in the medium term. Digitization and capturing Generation Z loyalty remain key strategic priorities for its retailing brands. We consider shares in Wesfarmers significantly overvalued compared with our unchanged AUD 43 fair value estimate. At current prices and our fiscal 2025 earnings estimate, shares trade at a P/E ratio of 28. For a conglomerate with a 10-year EPS compound annual growth rate of 6%, we think the premium is unwarranted. Our valuation and earnings estimates imply a fair P/E ratio of 18.