Where will the next $75 billion come from for Wesfarmers shares?
A woman looks at a tablet device while in the aisles of a hardware style store amid stacked boxes on shelves representing Bunnings and the Wesfarmers share price
Wesfarmers Ltd (ASX: WES) shares have done very well for shareholders, rising 31% over the past six months. As we can see on the chart below, it has now surpassed the COVID-19 peak during 2021.
But the question is, with the business now having a market capitalisation of over $75 billion, what could drive earnings and the Wesfarmers share price higher?
The business recently held a strategy day to reveal some of its plans and expectations. Key parts of the plan include strengthening existing businesses and renewing the portfolio through value-adding transactions.
It’s a 95-page presentation, so I’m going to pick out the two main strategies I think are key.
Continue winning with Bunnings and Kmart
Wesfarmers has a portfolio of high-quality businesses. The company said it has strong, value-based retail offers with broad customer appeal.
In this era of elevated inflation “lowest prices credentials [are] resonating strongly with value-focused customer.”
The business is underpinned by a “strong balance sheet to support disciplined, long-term investment, and data and digital capabilities that drive further productivity and efficiency gains.”
Wesfarmers said it is well-positioned to deliver “strong growth and returns over the long-term”, with its retailers to benefit from demand growth from demographic changes, as well as network and population growth.
The company is deploying further automation and technology in its supply chain.
It’s expanding the rollout of RFID (radio frequency identification) technology in Kmart Group to improve demand forecasting, product availability and incremental sales. Wesfarmers also pointed to digitisation of Kmart’s sourcing and supply chain, including 3D design, which will mean reducing lead times, improving availability and reducing costs.
A key growth avenue for Kmart for the foreseeable future is introducing Anko products into global markets, which increases its addressable market. It’s looking at retail partnerships through wholesale agreements, as well as ‘white label’ partnerships.
With Bunnings, a new workforce planning tool and enterprise agreement “enable Bunnings to reinvest productivity improvements into customer service.”
Product expansion can be an important earnings driver, such as the expansion with pet products, renewables and ‘smart home’ at Bunnings. Bulk pack sizes are offering “compelling value” and a “differentiation” of the offer.
New growth industries
Healthcare and lithium are two key areas that the company is looking towards as future growth avenues (and could help Wesfarmers shares).
Wesfarmers is working on the Mt Holland project through its 50% stake in Covalent lithium. It’s accelerating the project to generate cash flow and lower the average unit cost.
The company is awaiting regulatory approvals to double the production capacity of the mine and concentrator before the final investment decision (FID). A refinery expansion will be considered after commissioning. The refinery construction is now 75% complete. Lithium hydroxide production is expected in the first half of the 2025 calendar year.
Wesfarmers thinks the demand for battery-grade lithium will be driven by an increasing amount of electric vehicles (EVs). The number of EV sales is expected to grow by between 20% to 25% in 2024.
Turning to healthcare, the company has made a number of healthcare acquisitions including Priceline, Clear Skincare Clinics, Silk Laser Australia and InstantScripts.
Wesfarmers points to growing demand for health products and services, and an increasing role of community pharmacists in primary care. There’s an increasing spend on beauty and wellbeing products and services. The company can also benefit from the increasing adoption of digital delivery models.
The company also revealed it’s continuing to explore “expansion opportunities in logical adjacencies”.
Wesfarmers share price snapshot
In the 2024 year to date, Wesfarmers shares have gone up around 20%.
Wondering where you should invest $1,000 right now?
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes could be the ‘five best ASX stocks’ for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now…
See The 5 Stocks *Returns as of 1 February 2024
More reading
Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.