What’s Stopped Me From Buying Wm. Morrison Supermarkets Plc Today

Royston Wild considers the investment case for Wm. Morrison Supermarkets plc (LON: MRW).

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Today, I am looking at Wm. Morrison Supermarkets (LSE: MRW), and deciding whether to add it to my own stock portfolio’s ‘bagging area’.

Shoppers continue to shun ailing chain

Like Britain’s number one chain Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), Morrisons has been a major casualty of the assault on the grocery sector’s middle ground. Premium alternatives such as Waitrose and Marks & Spencer, as well as budget brands including Aldi and Lidl, have eaten into market share as the firms’ pricing initiatives and product quality have come under the spotlight.

And latest Nielsen data confirms that Morrison is still suffering declining appeal with UK shoppers. Total market share fell to 10.8% in the 12 weeks to July 20, according to the research house, down from 11.1% in the same 2012 period.

And Morrisons’ sales rose just 2.3% from the corresponding period last year — this was the lowest rate of growth across the UK’s 10 biggest retailers, and compares with 5.3% for Tesco, 11.5% for Waitrose and a stonking 28.8% for Aldi.

Transformation plans still in early stages

Morrisons has initiated a programme of store refurbishments to resuscitate its ailing retail business and, like most of its rivals, plans to rapidly expand into the red-hot convenience store space — the firm is looking to open up to 100 of these outlets by the end of the year.

The company has also emerged as a latecomer to the booming online grocery business through its tie-up with home delivery specialists Ocado, a scheme given the green light by the latter’s shareholders last month. The deal will see Morrisons offer online shopping by January, and provides the firm with Ocado’s technology and warehousing space.

However, the UK’s largest chains have many years of experience in this area and will be expected to mount a dogged defence against Morrisons’ online proposition.

Expect fresh near-term woes to crimp retailer

And City analysts are far from enthusiastic over Morrison’s near-term earnings prospects — a 5% decline is earmarked for the year ending January 2014, with a modest 4% rise forecast for the following 12-month period.

And I believe that the supermarket’s prospective P/E rating of 11.1 — although just above the value benchmark of 10 — trades at an unjustifiable premium to rival Tesco’s current readout of 10.2. In my opinion, the latter’s much larger financial clout, scale and expertise provides the firm with a much better chance to fulfil its ambitious turnaround strategy.

Fill your basket with bundles of cash

So I believe that Morrisons still needs to undertake a gargantuan amount of work to transform its ailing fortunes, a situation not helped by enduring pressure on consumers’ wallets and the size of the competition.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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