Why I Decided To Sell WM Morrison Supermarkets PLC

There’s no longer any value to be had in WM Morrison Supermarkets PLC’s (LON: MRW) shares.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

I originally brought Morrisons (LSE: MRW) shares as I thought the company looked cheap. At around 180p per share, the company was trading below the value of its property on the balance sheet and book value, after for accounting for liabilities. 

However, over the past six months the UK retail market has changed drastically, and Morrisons has started to look over, not undervalued. 

Changing landscape

For more than a year, it’s been clear that Morrisons is struggling to compete in an increasingly competitive retail market. Nonetheless, Morrisons has the tools available to it to make a comeback. Unfortunately, the company is not moving fast enough. 

Indeed, Morrisons has long been criticised for failing to keep up with the rapidly changing retail environment. For example, the company has only really entered the online market, its attempt at a customer loyalty scheme leaves much to be desired and the company’s in-store offering is is disappointing when compared to the likes of Tesco

Still, Morrisons was founded on the ‘stack em high, sell em cheap’ mentality that has helped upstarts Aldi and Lidl snatch market share from their larger peers. And after spending several years trying to go upmarket, Morrisons is now trying to return to its cheap and cheerful strategy in an attempt boost sales. 

But even though sales should, in theory, receive a boost from this strategy, earnings are set to take a big hit. In particular, City analysts expect Morrisons to report a pre-tax profit of £400m for the year ending 31 Jan 2015. Earnings per share are set to fall to 12.5p. These figures put Morrisons on a forward P/E of 13.9, which looks expensive considering the state of the UK retail market. 

What’s more, unlike peer Tesco, which deserves a premium valuation due to its market leading position and international exposure, there’s no obvious reason to pay a premium for Morrisons’ shares. 

Asset value 

Having said all of the above, what really attracted me to Morrisons in the first place was the company’s property portfolio. However, there have been several developments recently that lead me to reconsider this valuation metric. 

Firstly, Morrisons is selling a large chunk of its property to pay off debt and fund its lofty dividend. And secondly, as the UK retail environment changes, there’s a very real possibility that the value of Morrisons’ large superstores may be marked-down as their earnings potential evaporates. These two factors could quickly erase Morrisons’ asset value and shareholder equity. 

All in all, there’s just too much uncertainty surrounding the company and its outlook right now. So, I’ve now sold my Morrisons holding, and I’m looking for opportunities elsewhere. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Two business people sitting at cafe working on new project using laptop. Young businesswoman taking notes and businessman working on laptop computer.
Investing For Beginners

Up 10% in a day, this FTSE 250 stock still looks undervalued to me

Jon Smith explains why a FTSE 250 finance stock has soared higher and flags up reasons why this might not…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Rolls-Royce shares are close to reaching £10. Is it too late to buy?

Rolls-Royce shares have come a long way. With the price within spitting distance of £10, our writer considers whether he…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

With H1 profits back on track, is this FTSE 250 housebuilder ready to bounce back?

Operating profits are down 22% at Vistry. But as cost issues give way to government support, could the FTSE 250…

Read more »

Investing Articles

2 fantastic UK growth stocks to consider for a Stocks and Shares ISA

Looking for opportunities for a Stocks and Shares ISA portfolio? Our writer shares two ideas from the London Stock Exchange.

Read more »

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

Investors could target £8,840 of annual dividend income from 5,851 shares in this FTSE 250 high-yield star!

Shares in this FTSE 250 stock generate a much higher dividend yield than the index average and can produce potentially…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

HSBC’s share price has dipped 5% to just over £9, so should I buy more right now?

HSBC’s share price has dipped in recently, but this could signal a bargain to be had. I ran the key…

Read more »

many happy international football fans watching tv
Investing Articles

Is this FTSE 250 stock gearing up to more than double its market cap by October?

Our writer considers the implications of a recent stock market announcement for the share price of this FTSE 250 retailer.…

Read more »

Inflation in newspapers
Investing Articles

3 overlooked UK shares growing dividends faster than inflation

Mark Hartley highlights three lesser-known UK shares offering inflation-beating dividends, while noting key risks investors should watch.

Read more »