What a difference a year can make.
It’s easy to forget that the shares of Morrisons (LSE: MRW) changed hands at about 280p only 12 months ago. Back then, they traded in line with the mean price target from brokers covering the stock.
Now analysts believe the stock of the UK’s fourth-largest retailer could reach 200p, which means it could rise by 17% from its current level. Will analysts be proved right? If so, how long will it take for Morrisons to reach 200p?
It’s difficult to find a strong argument supporting the view that Morrisons trades in bargain territory, but a price target of 185p to the end of 2014 appears reasonable. If you are on the hunt for value, however, you should consider other sectors in the next six to 12 months, in my view.
Looking For Catalysts?
There is no “catalyst” — as analysts call events that could impact the valuation of a stock at any given time — between now and 8 January 2015, when Morrisons reports its Christmas trading update. In a way, that is not such bad news.
In recent months, most of the events associated to the food retail sector have not pleased investors, although Morrisons shares have rallied (+13%) with the sector since a trough of 151p on 27 October. Morrisons reported a decent trading update last week, which showed good progress with regard to the purchase habits of its customers.
Based on recent trends and performance, the equity valuation of Morrisons could certainly rise to 185p by the end of year, but a further appreciation of its shares hinges on whether investors will decide that Morrisions — which is financially weaker than Tesco and Sainsbury’s — has more restructuring upside and growth potential than its larger rivals.
Landscape
German discount chain Aldi said on Monday that it would open 550 new stores in Britain over the next eight years, investing £600m to double its store estate to 1,000. This didn’t come unexpected.
The good news is: difficult trading conditions and a competitive landscape are already priced into Morrisons stock.
The bad news is: fundamentals and trading multiples are not reliable indicators at this point in time and offer no indication as to whether the stock may be overbought or oversold.
It’s about sentiment in the marketplace. Reuters reported last week that “12.3% of Morrisons shares are on loan, making it the second-most borrowed FTSE 100 stock, behind Sainsbury’s.”
There’s reason to believe that Morrisons stock would have not been hammered if Tesco had not been forced to slash its dividend and admit it cooked the books earlier this year. Tesco has dominated the headlines for all the wrong reasons for a few months now, and since mid-September it has dragged down the valuation of the entire food retail sector.
It’s is not over yet. As such, the shares of Morrisons and those of other retailers may offer upside, but should be held only as part of a diversified portfolio.
