Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) is a declining stock in a declining sector. But here are five ways it could still make you rich.
1) By implementing a massive turnaround
Morrisons is bottom of the big four supermarkets right now. Not only is its market share lower than Tesco, Asda and J Sainsbury, it is sinking faster as well. Morrisons was crunched over Christmas, and the squeeze has continued this year. Sales fell 4% in the four weeks to 2 February, according to latest data from Kantar Worldpanel. This makes troubled Tesco (down 0.8%), Asda (down 0.7%) and Sainsbury’s (up 0.1%) look flourishing by comparison. The big question is whether management at Morrisons can do anything about it.
2) And making up lost ground
Morrisons isn’t just in decline, it is declining in a declining sector. The grocery market is “very tough”, management admits. But Morrisons has made things tougher for itself, by failing to build a booming online business, and coming late to the convenience store party (Sainsbury’s and Tesco are already in full swing). But there is hope. It is belatedly expanding its chain of M Locals, and now has more than 100 stores. Its online food operation is (finally) ready. These two developments may help it to claw back lost ground.
3) Through a takeover
I’m always wary about buying into a company on takeover speculation, which all too often never materialises into a bid. But if that’s your bag, you might want to consider Morrisons. It shares surged earlier this month, on reports that its family founders, who still own roughly 10% of its shares, were trying to set up a £7 billion private equity buyout. President Ken Morrison has poured scorn on the suggestion, but rumours persist. Its lucrative property assets could make it a tempting target. I don’t invest on takeover speculation, but you might.
4) Because it’s cheap
When your share price falls 18% over two years, two interesting things happen. First, your stock valuation falls. Morrisons currently trades at just 8.8 times earnings, against 9.3 times for troubled Tesco and 11.4 times for soaring Sainsbury’s. The second nice thing is that your dividend yield rises. Morrisons now yields 4.92%, covered 2.3 times. That pips Tesco at 4.44% and Sainsbury’s at 4.77%. Buy now and you’re getting a bargain bin valuation with a handsome income stream thrown in. Then all you have to do is patiently wait for the business to recover. Although you might have to be very patient.
5) By beating forecasts
If you’re still tempted to take Morrisons to the till, check out its earnings per share (EPS) forecasts. After falling 13% in the year to 31 January, EPS are forecast to drop another 5% in the next 12 months. Things should pick up after that, just, with forecast 3% growth in the year to 31 January 2015, which should take the yield to 5.3%. Strong-stomached, far-sighted investors may be willing to shop at Morrisons. If it cracks online and convenience shopping, they may be rewarded, given that online grocery sales are forecast to double to £11.1 billion by 2017, and the convenience store market looks set to grow 29%, according to The Institute for Grocery Distribution. So there is something for management to aim at.
