Morrisons (LSE: MRW) has been the sickest of the supermarkets over the past 12 months, with its shares down 46% by late October. Part of the reason was its dreadfully late entry into the online shopping market, years after Tesco had pioneered it and Asda had taken it up in strength.
Over the same period, Ocado (LSE: OCDO), the operator of Morrisons’ online business, saw its shares slide by 44%. But in the past month, Morrisons shares have put in a 20% recovery to 180p, and Ocado has stormed back by 40% to 321p.
Back on track?
Ocado itself has had a rocky ride, but its shares are now trading comfortably above their flotation price. So what’s behind the turnaround?
Morrisons’ Q3 update announced “continued progress on the three year plan“. With total sales (excluding fuel) down 3.6% in the quarter, things were still slipping — but more slowly. Like-for-like sales were down 6.3%, pretty much as expected, but online shopping made a positive contribution of 0.7%.
The company also reckons its Match & More points card, which is the only one so far to price match against Lidl and Aldi, is proving popular — although it sounds fiendishly complicated to me.
Strong sales
Meanwhile, Ocado’s third quarter brought in a 22.5% rise in total sales to £231.9m, with average orders per week up 17.4% to 163,000, with the firm saying its “business with Morrisons continues to successfully scale with demand“. Ocado also opened its Sizzle.co.uk specialist kitchen and dining site in August.
Ocado looks on course to record its first annual profit for the year ending 30 November. It’ll be around 2p per share if analysts have it right, but there’s a doubling to 4p penciled in for 2015. Fundamentals don’t mean much right now, so an investment today must be pinned on sales volumes continuing to rise strongly.
Back at Morrisons, despite the last year’s price fall, the shares are still on a forward P/E of 14.6 for January 2015, dropping to 13 for the following year, simply because EPS is expected to halve. With analysts still holding out for barely covered dividends of 6.7% and 5.6% this year and next, there’s clearly a lot of faith in Morrisons’ recovery.
A nice pair?
For me, I’m not sure what the attraction is and I don’t quite see where Morrisons fits in the sector — perhaps it’s trying to position itself as a full-service competitor to Tesco, but at Lidl prices? But it is starting to look like the Ocado/Morrisons connection could be a winning one.
