The ASX 200 is up about 2% in 2024 so far, but there have been some big winners at the stock level. This article shares the thoughts of Morningstar analysts on three of the best performers so far: Wesfarmers (ASX:WES), NextDC (ASX:NXT) and WiseTech Global (ASX:WTC).

For each company, we’ll look at Morningstar’s outlook and the moat rating, fair value, uncertainty rating and star rating (out of five) assigned to their shares. You can find more information about these measures and how our analysts assess them at the foot of this article.

Wesfarmers ★

Moat Rating: Wide
Fair Value: $43.00

Price To Fair Value: 1.43x (overvalued)
Uncertainty Rating: Medium

Shares in Australia’s best-known conglomerate are up by more than 20% in 2024. The company announced strong H2 results and a dividend hike in February. They also provided a bullish trading update at the start of May and investors appeared to like it stepping back from a potential acquisition of Ramsay Healthcare.

Wesfarmers’ activities span discount department stores, office supplies, home improvement, energy manufacture and distribution, industrial and safety supplies, chemicals, and fertilizers. Most earnings are retail related, more specifically to hardware retailing in the Bunnings chain. Our analysts have assigned Morningstar a Wide Moat rating due to cost advantages that stem from its impressive scale in retailing. A wide moat rating means that our analysts think Wesfarmers can earn excess returns on capital for at least 20 years.

Wesfarmers management see abundant sales growth opportunities in the core Bunnings business. Morningstar Australia’s head of equity research Johannes Faul agrees with this and also sees room for Wesfarmers to cut costs, supporting operating margins and reinforcing its low-price value proposition. Wesfarmers’ second-largest segment, Kmart, has opportunities to generate export sales with its private-label Anko brand, but Faul thinks any earnings are likely to be immaterial in the medium term. Digitisation and capturing Generation Z loyalty remain key strategic priorities for its retailing brands.

At around $68 per share, Wesfarmers looks significantly overvalued compared with Morningstar’s fair value estimate of $43. At current prices, the shares trade at a P/E ratio of 28 related to our analyst's estimate of fiscal 2025 earnings. For a conglomerate with a 10-year EPS compound annual growth rate of 6%, Faul thinks the premium is unwarranted. His estimates imply a fair P/E ratio of 18. These forecasts carry an uncertainty rating of medium due to the discretionary nature of Bunning’s consumer markets and cyclicality in its trade business, which serves the construction industry.

NextDC ★★

Moat Rating: No Moat
Fair Value: $14.00
Price To Fair Value: 1.25x (overvalued)
Uncertainty Rating: Medium

Data-centre operator NextDC's shares have risen over 29% in 2024 thanks to strong demand for cloud computing infrastructure and excitement around artificial intelligence.

Morningstar’s NextDC analyst Dan Baker thinks NextDC is well-placed to benefit from these megatrends but currently lacks enough of a network effect, cost advantage or switching cost element to warrant an economic moat. Australia’s data center industry is growing quickly and there are several players investing heavily to capture this demand, including the world’s leading co-location provider Equinix (NAS:EQIX).

Baker expects NextDC will continue to see growing demand and thinks that NextDC’s revenue can double by fiscal 2029 based on its current forward order book. The company’s strong results in the first-half of fiscal 2024 led him to raise his fair value estimate for NextDC from $12 to $14. He attaches an uncertainty rating of medium to this valuation, as its asset-heavy business model makes it susceptible to a decline in data center demand, even though that appears unlikely in the near-term. At around $17, NextDC’s share price looks moderately overvalued.

WiseTech Global ★★★

Moat Rating: Narrow
Fair Value: $100.00
Price To Fair Value: 0.99x (fairly valued)
Uncertainty Rating: Medium

Shares of logistics technology leader WiseTech have risen over 28% in 2024 to date.

WiseTech’s first-half earnings featured revenue guidance at the lower end of their previous range. There were, however, several signs of a rosy long-term outlook. This included news that most of the world’s top 25 freight forwarders now use CargoWise, WiseTech’s best-in-class software for international freight-forwarding by air and ocean.

Morningstar analyst Roy Van Keulen believes WiseTech has a narrow moat due to switching costs and network effects in its core CargoWise product. He thinks these switching costs are evidenced by retention rates of over 99% over the past decade despite material price increases. Van Keulen also sees evidence of network effects as freight forwarders are incentivised to use supply chain partners that are integrated with CargoWise.

Van Keulen believes that CargoWise clients will significantly outperform their peers due to the efficiency and productivity improvements the platform provides. He therefore expects CargoWise to become the industry default. Van Keulen’s fair value estimate of $100 per share assumes annual revenue growth of 24% until 2033 and an increase in group EBIT margins (earnings before interest and tax) to 51% from 37%.

He assigns an uncertainty level of high to these forecasts. As the logistics industry’s digitialisation is still in its early stages, the ultimate opportunity size and adoption rate of WiseTech products remains to be seen. At a price of around $98 today, WiseTech shares trade roughly in line with Van Keulen’s fair value estimate.

Terms used in this article

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.