Should You Buy Wm. Morrison Supermarkets plc?

<%= article.AuthorDisplayName %>

By

Royston Wild

Published in Company Comment on 1 March 2013

How attractive are the shares of Wm. Morrison Supermarkets plc (LON: MRW)?

I believe investors should steer clear of Wm. Morrison Supermarkets (LSE: MRW), as the prospect of mediocre earnings growth in an already-challenging environment for Britain's grocery chains threatens to send the company's shares lower.

Despite ploughing more than £1 billion into the business over the past year, Morrison continues to lose ground against its main competitors. And a lack of near-term price catalysts is exacerbated by the ongoing struggles experienced in the UK's retail sector.

Market share continues to crumble

Retail research specialists Nielsen noted in its most recent report that Morrison's fortunes have continued to slide into 2013. The consultancy estimates that the supermarket's sales dropped 2.8% in the four weeks to 1 February, with like-for-like sales down around 5% in financial terms and substantially more in volume terms.

And the chain's market share continues to head lower, ringing in at 10.6% during January versus 11.2% during November. Indeed, Morrison's market share is down 0.8% from the same point in 2012.

Expect earnings to remain under pressure

Morrison's earnings per share are projected to rise just 4% to 26p for the year ending January 2013, according to City analysts. Earnings per share are then expected to remain flat in 2014 before edging 4% higher to 27p the following year.

The grocer trades on a sub-10 P/E ratio, and a reading of 9.8 for this year and next is predicted to fall to 9.4 in 2015. But such a lowly price rating is to be expected, given the deteriorating data are pointing towards further earnings pressure -- and the potential for further downgrades -- sooner rather than later.

Decent dividends lighten earnings stagnation

A redeeming feature of the supermarket chain is its plump dividend policy. Analysts predict a dividend yield of 4.5% for 2013, which is anticipated to rise to 4.8% and 5.1% in 2014 and 2015 respectively.

Decent dividend cover also provides income investors some with peace of mind, a critical factor given significant fears over future earnings growth. A forecast dividend of 12.7p and 13.3p per share for 2014 and 2015 are covered 2.1 times for both of the next two years.

The expert view on optimising returns

Still, I believe that investors should keep Morrison on the shelf while revenue projections remain bleak. There is a wide selection of other stock opportunities on offer, boasting both solid earnings growth and dividend payment, which should be attracting investors' attention instead.

Indeed, if you are looking to boost your investment returns significantly from other companies, check out this special Fool report, which outlines the steps you might wish to take if you are hoping to become seriously rich from other shares.

Our "Ten Steps To Making A Million In The Market" report highlights how fast-growth small-caps and beaten-down bargains are all fertile candidates to produce ten-fold returns. Click here now to enjoy this exclusive 'wealth report' -- it's 100% free and comes with no obligation.

> Royston does not own shares in Wm. Morrison Supermarkets plc.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Mari11ion 01 Mar 2013 , 11:45am

Morrison's is now entering a growth phase with their expansion into convenience stores, following the purchase of numerous ex blockbuster stores, and they are the only major supermarket to emerge unscathed from the horsemeat scandal. They are reporting massive increases in meat sales. That doesn't sound like a "lack of near-term price catalysts" to me.

johnqq 01 Mar 2013 , 1:44pm

They also have much less horsemeat scandal exposure.

Excel35 01 Mar 2013 , 2:29pm

If we wait to buy when they are doing everything right, the price will be higher.

While MRW are being slated and downgraded is the best time to buy, then as they announce convenience stores and online expansion plus any other business improvements the upgrades will come.


TMFMarkRogers88 01 Mar 2013 , 4:02pm

I personally would try to more or less ignore any relationship between the horse scandal and the valuation of Morrisons or Tesco - not only can it not be quantified in a reasonable way, it's also likely to be negligible to the long-term business value of any UK supermarket.

Morrisons is a tricky one, but a very interesting opportunity. It has identified that the future of retailing is online, and has admitted the need to expand into more convenience-style express stores. The problem of course is, despite having now recognised that, Morrisons has no online presence and less than a handful of "M" stores.

So the difficulty lies in the speculative element of whether the new Morrisons business model into which they're expanding, will reflect the long term excellent history shown in their track record. That is, if there's much change to what their business really looks like five years from now (if the future isn't in online for example, they'll still have the existing business they operate now, with how ever many new stores they add. This would make analysis easier).

Usefully, the price is obliging in this case, and the company has been knocked down to a no-growth multiplier. Dealing with a change in the underlying business complicates things, but investors can be relatively assured by the long-term track record and the retirement of over £1Billion of common stock.

Marrying the unknowable elements of the company's future to the price may be easier for some investors over others. It's a very attractive price, and a future that's less difficult to predict than a technology company for example. Morrisons have a great record of picking their fights well - being a late mover into "online" might be to their advantage. They might be particularly selective with their choice of express stores.

But maybe the biggest enemy to the evaluation of Morrisons practically, is that Tesco currently sits on more-or-less the same earnings yield, and has arguably the best record of any company in the UK. If Tesco was fully priced, then Morrisons would potentially win a beauty contest here, but both are pleasantly priced for investment.

F958B 01 Mar 2013 , 5:14pm

If I was looking for something to buy at the moment, Morrisons would be close to the top of my list.
Growth has stalled - but that's why the shares are cheap: lack of growth is already priced-in.
If growth remains sluggish the shares will go nowhere but pay a nice 5% dividend which is well-covered and underpinned by string finances.
If Morrisons get back in stride, mid-to-high-single-digit growth is quite possible, and the shares would probably be re-rated back into line with at least the average on the market (which would put them around 350p if the FTSE manages to hold these high levels).
In fact, if Morrisons get rolling again, the share price might deserve to be closer to 400p because of their resilient revenues (similar to Unilever, Diageo, BAT, Reckitt etc) which the market is ignoring at the moment because the mood is "risk-on" and into cyclicals.

Everyone declared Tesco dead when the shares crashed to 315p a year ago.
Tesco did not die. The shares are now +20%; +30% for anyone who managed to pick them up just under £3. With a 5% Dividend on top.

Morrison, like Tesco, will not die any time soon.
They might even be taken over - the shares sit only slightly above their net asset value.
I'd buy the whole company if I could raise the funds. It's be worth it just for the assets - with a business thrown in for free.
Buy a business, get assets for free. Or buy the buildings and get a steady business thrown in for free.

UncleEbenezer 01 Mar 2013 , 6:11pm

Isn't expansion into convenience stores yesterday's story? Can't say a belated me-too inspires me very much.

jaizan 01 Mar 2013 , 6:53pm

Why are Morrisons sales falling, whilst Sainsburys sales are up? Is their stock availability and customer service deteriorating like at Tesco?
I visit all the supermarkets except Morrisons. It's very easy to see what Tesco do wrong and what Sainsburys do right. What about Morrisons?

jackdaww 03 Mar 2013 , 5:19pm

i'm a big fan of morrisons and certainly hold the shares.
what do they do wrong ?
for me the following...
1. extremely loud alarms when someone touches a checkout gate - staff are slow to reset.
2. self service checkouts too small and unreliable - tesco's are much better.
3. cafeteria tray runs obstructed.
4. suspect IT systems.
on the plus side their staff are enthusiastic and engaging - far better than tesco's po faced lot.
food wise their fish and meat counters are far superior -- as are their cafeterias.

jaizan 03 Mar 2013 , 7:06pm

Asda self service checkouts are way ahead of Tesco, so I dread to think what sort of mess Morrisons are making of it.
Out local Tesco has 6 self service check outs at each end, but half them are frequently closed, even when there are queues in the shop.
Asda have a nice block of 12, always open. Helps keep queues down at quiet times.

chubbybrown 04 Mar 2013 , 11:58am

I'm a morrisons fan,but waiting for those 2.30-2.40 days to buy.
you speak to Tesco managers and its not sainsbugs they are worried about,its Morrisons

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.

Get straightforward advice on what’s really happening with the stock markets, direct to your inbox. Help yourself with The Motley Fool Collective, a FREE email newsletter designed to help you protect and grow your portfolio wealth.

By submitting your email address, you consent to us keeping you informed about updates to our website and about other products and services that we think might interest you. The Motley Fool respects your privacy. Please read our Privacy Statement and Terms & Conditions.

For all queries please email CustomerServices@Fool.co.uk or call The Motley Fool on 020 7462 4300 between 9am – 5pm, Monday – Friday.

More articles in this section

Beta

Tags for this article

This article hasn't been tagged yet. Be the first to add a tag below.

Login or register to add tags.

Beta

Related content