You may be surprised to learn that shares in Morrisons (LSE: MRW) have outperformed the FTSE 100 since the turn of the year. That’s a major achievement and, while it is only by 2% (and there is a long way to go until the end of the year), things appear to be on the up for the northern-focused supermarket chain. And, with investor sentiment on the up and a relatively low valuation, Morrisons could make gains of over 20% to add to the 9% already posted since the turn of the year. Here’s why.
A Changing Landscape
The days of the credit crunch are, thankfully, long gone. The UK banking sector is becoming increasingly profitable, the UK economy is one of the fastest growing economies in the developed world and, crucially, wage rises are now ahead of inflation. Of course, while inflation is zero, it’s not difficult for wage growth to beat it, but the effect of such a situation could be significant on the bottom line of Morrisons.
In fact, it could prove to be the catalyst that pushes the company’s shares to even higher highs, since it means that the company’s sales could gain a boost after a number of disappointing years. In fact, higher disposable incomes in real terms may cause shoppers to focus less on price moving forward, which would be hugely beneficial to mid-end operators such as Morrisons, which have suffered from the loss of customers to cheaper, no-frills operators such as Aldi and Lidl in the past.
A New Strategy
Although Morrisons has only recently changed its management team, the company’s long-term strategy is likely to remain similar to what it was under the old regime. For example, online is set to become an even bigger part of Morrisons’ business and, while the pace at which is opens convenience stores is slowing, there is undoubtedly significant growth potential in this space. And, with a new management team set to make efficiencies and rationalise the business, Morrisons is likely to become leaner and, ultimately, more profitable over the medium to long term.
Valuation
While Morrisons made a significant loss in each of the last two years, it is forecast to return to profitability this year. And, with investor sentiment being relatively buoyant, its shares trade on a rather generous price to earnings (P/E) ratio of 16.9 at the present time.
Looking ahead, Morrisons is expected to increase its earnings by 19% next year, which is a very impressive rate of growth. Moreover, if it maintains its current rating and does deliver on its forecasts, its shares could be trading as high as 236p.
That’s 19% higher than their current price level and, with the full benefits of a new strategy and an improving economic climate only set to be fully felt over the medium to long term, gains of over 20% appear to be very much on the cards.
