Today I am looking at why Morrisons (LSE: MRW) remains a poor stock selection for savvy investors despite perky broker forecasts.
Earnings bounceback expected from 2016
To the uninitiated, Morrisons may appear to offer great value for money for those seeking both terrific earnings and dividend growth. An environment of rising industry pressures is anticipated to see earnings dive 51% in the year concluding January 2015, worsening from the 8% slide recorded last year.
However, the City’s abacus bashers expect the supermarket to get the bottom line moving again from next year, and predict rises to the tune of 11% and 9% in fiscal 2016 and 2017 respectively. As a result Morrisons changes hands on a P/E multiple of 14.9 times for next year — any reading around or below 15 times is generally considered splendid bang for one’s buck — and which slips to 14.1 times for 2017.
And although attempts to bolster the balance sheet are expected to prompt a second consecutive dividend cut in 2015, Morrisons still carries yields which batter its big-cap opposition. The business is anticipated to reduce the total payment from 13p last year to 12.5p per share this year, and then again to 10.3p in 2016.
Still, this figure creates a meaty yield of 5.2%, and expectations of a modest rise in 2017 — to 10.4p — keeps the yield locked at this level.
… but analyst optimism remains puzzling
But quite why the broker community remains so upbeat over Morrisons’ prospects in the coming years is beyond me. The company emerged from the Christmas trading period as the major casualty amongst the established ‘Big 4’ chains, with like-for-like sales dropping 3.1% during the holidays.
Not only is the business facing mounting pressure from the expansion of discounters Aldi and Lidl, but Morrisons’ late entry into the growth sectors of internet and convenience store shopping also leaves it lacking against its mid-tier rivals, particularly Tesco and Sainsbury’s who have been trading online for donkey’s years.
Bafflingly, Morrisons’ turnaround strategy remains centred around heavy price slashing across the store, complemented by insipid bolt-ons such as extended opening hours and loyalty cards. Quite why the grocer remains committed to this failing policy remains to be seen, particularly as the business of discounting is a vastly expensive one.
Ordinarily, Morrisons’ announcement that chief executive Dalton Philips’ is to step down this month would be greeted with waves of optimism and expectations of fresh ideas. But chairman Andrew Higginson’s subsequent assertion that the firm’s recovery strategy is “well cast” suggests that the board remains clueless as to how to jump-start sales growth.
Having said that, Morrisons is not alone in this respect, with Tesco chief executive Dave Lewis’ strategic update this month also light on ideas on how to draw shoppers back through the door, other than through yet more price reductions, naturally. Given the structural changes currently afoot in the British supermarket space, I believe that investors looking to fill their basket with strong growth candidates should look elsewhere.
