Top City fund manager Neil Woodford hit the investing headlines last year, when he sold his Tesco shares and invested in Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US).
It was a controversial decision for Tesco fans, but I reckon Mr Woodford may be right about Morrisons.
Morrisons is ringing the changes
The big difference between Morrisons, Tesco and J Sainsbury, is that Morrisons is the only supermarket that doesn’t offer online food retailing and home delivery. Until recently, Morrisons didn’t have any convenience stores, either.
Being a late arrival at the two biggest growth parties in the supermarket business isn’t necessarily a good idea, but it’s worth remembering that Morrisons has been doing quite well without them. Success in these two new ventures could enable Morrisons to take market share away from Tesco and Sainsbury and deliver genuine growth.
Home delivery costs
What’s more, although home delivery is popular with customers, it isn’t very profitable for Tesco or Sainsbury. Neither company discloses the true costs of their services, but some analysts believe they run at a loss, and that the true cost of home deliveries is £10-£20 per order, which is effectively subsidised by in-store customers.
Looked at in this light, Morrison’s patient research — it spent a year studying the operations of US online food retailer Fresh Direct — and its decision to partner with Ocado may yet prove to be a smart move.
Growth from small stores
According to Morrisons, the UK convenience market is currently worth £36bn, and accounts for 21% of all grocery sales, a proportion that is expected to rise to 30% by 2017.
Clearly Morrisons needs to be in this market, but although the firm is a late arrival, it aims to have 100 M Local branches open by the end of 2013.
Morrison’s M Local stores will offer fresh produce at supermarket prices, and the M Local program has been accelerated this year, following Morrison’s acquisition of 62 empty shop units, including a number of town centre stores.
Cheap and profitable!
The final part of my argument for investing in Morrisons is that it’s cheap and profitable. Morrisons trades on a forward P/E of 11.0 and a prospective yield of 4.5%, and its operating margin of 5.2% is higher than that of both Tesco and Sainsbury.
I think that Morrison’s undemanding valuation and growth potential make it a very attractive buy, at today’s share price.
Finding another Morrisons?
If you already own shares in Morrisons, you might be interested to learn about some of Neil Woodford’s other top shareholdings.
Mr Woodford’s stock choices are usually worth a closer look, and can sometimes reveal low-risk, big cap bargains. If you’d invested £10,000 into Mr Woodford’s High Income fund in 1988, it would have been worth £193,000 at the end of 2012 — a 1,830% increase!
> Roland owns shares in Tesco but does not own shares in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco and has recommended Morrisons.