Wesfarmers shares (ASX: WES) are extending their recent recovery after an upgrade from Morgans to ‘Accumulate’ cited improved lithium price assumptions that lift medium-term earnings forecasts.
The Wesfarmers share price heads into the open at A$76.48, marking a 7.33% gain since last Monday’s close. The move follows a prolonged period of underperformance that saw the stock make 52 week lows at A$70.80.
Broker Upgrade
Morgans lifted its rating from ‘Trim’ to ‘Accumulate’ and raised its 12-month target price to A$81.10 from A$80.50, implying a forecast total shareholder return of approximately 12%. The upgrade is notable for its focus on outer-year earnings, with the broker adjusting group EBIT forecasts for FY27 and FY28 upward by 2% in each year, while leaving FY26 estimates unchanged.
The revisions are primarily driven by updated lithium price assumptions, reflecting stabilisation in the battery materials market after a prolonged downturn. Wesfarmers’ half-year results presentation for the period ending December 2025 highlighted that lithium pricing improved significantly in the second quarter compared to the first half of 2025, providing tangible evidence of a market inflection point.
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The company’s 50% stake in the Covalent Lithium joint venture with SQM has emerged as a key medium-term earnings driver, with production ramping up as prices recover from cyclical lows. The timing of the upgrade suggests markets may have been underestimating the contribution from this division as the energy transition and electric vehicle adoption continue to drive long-term demand for battery materials.
Financials Underpin Quality
The broker upgrade builds on solid fundamentals demonstrated in Wesfarmers’ half-year results for the period ending December 31, 2025. The company reported revenue of A$24.2 billion, up 3.1% year-on-year, with statutory net profit after tax reaching A$1.603 billion. The result showcased the resilience of the group’s core retail divisions which continued to post solid numbers despite ongoing cost-of-living pressures on Australian consumers.
Management increased the interim fully-franked dividend to A$1.02 per share, payable on March 31, 2026, reinforcing the company’s reputation as a reliable income generator. Operating cash flow remained robust at approximately A$2.5 billion for the half, demonstrating the strong cash-generative characteristics of the retail portfolio.
The positive broker call comes against a backdrop of mounting operational challenges. In early May, Wesfarmers indicated it would raise select retail prices to offset higher freight and fuel costs linked to geopolitical disruptions, particularly conflict-driven impacts on shipping routes and energy markets. The company also noted pressure on fertiliser prices, though government support has helped secure critical urea supplies for its chemicals division.
Strategy Day Looms
Markets will get further insight into management’s plans at the company’s Strategy Briefing Day scheduled for June 10, 2026, in Sydney. The event represents an opportunity for Wesfarmers to articulate its growth strategy across multiple fronts: accelerating the lithium ramp-up, expanding its health and beauty footprint through Priceline and Instantscripts, pursuing international growth for the Kmart and Anko brands, and advancing digital initiatives across the portfolio.
The key swing factors from here are whether lithium prices continue to stabilise and support the upgraded outer-year earnings assumptions, and how effectively Wesfarmers can navigate the consumer spending downturn while protecting margins. The recent bounce suggests markets are cautiously optimistic that the risk-reward balance has shifted in favour of patient holders, but with Wesfarmers shares testing resistance levels from back in early 2025, there could be further friction around current prices ahead.
Bull Case:
- Lithium price stabilisation lifts FY27-28 earnings forecasts by 2% each year
- Resilient retail divisions generate A$2.5bn half-year cash flow despite macro pressure
- Diversified portfolio provides defensive qualities and multiple growth levers simultaneously
- Broker upgrade at A$81.10 target implies 12% total return including dividends
- June strategy day could unveil compelling growth initiatives across health and international
Bear Case:
- Valuation remains premium despite moderate organic growth and cyclical headwinds mounting
- Consumer spending downturn threatens retail volumes as price increases test demand elasticity
- Lithium earnings highly volatile and execution-dependent with commodity price uncertainty
- Passive index ownership may have artificially supported valuation creating reversal risk
- Macro pressures from war-driven freight costs and inflation squeeze margins further
