At the start of 2016, few investors would have predicted the staggering returns that Morrisons (LSE: MRW) has posted in the last 12 weeks. That’s because the supermarket’s share price fell by 18% in 2015 and it seemed as though there was little hope of a turnaround, with investors being rather downbeat regarding its prospects.
However, Morrisons has risen by over 35% year-to-date and more gains are very much on the cards. That’s because it’s going back to its core offering of having good value produce in convenient locations. This is likely to prove popular with a customer base that’s now less likely to be as price conscious as it has been in the past, since wage growth is now comfortably ahead of inflation. And with Morrisons leveraging its status as a major food supplier through a deal with Amazon, its financial performance is very much on the up.
In fact, Morrisons is forecast to increase its bottom line by 36% in the current financial year. This puts it on a price-to-earnings-growth (PEG) ratio of just 0.7, which means that even a doubling of its current share price would equate to a PEG ratio of 1.4, which would still indicate good value for money.
Back in fashion?
Similarly, Debenhams (LSE: DEB) also appears to be in the midst of a successful turnaround. Its bottom line returned to positive growth last year and is expected to do the same in each of the next two financial years. And with it set to benefit from an improving outlook for the UK economy as well as a strategy that focuses on margins rather than purely on sales, Debenhams seems to be a company very much on the up.
With its shares trading on a price-to-earnings (P/E) ratio of just 9.7, Debenhams has considerable upward rerating potential. In fact, if it were to trade on the same rating as the FTSE 100 of 13, it would equate to a rise in its share price of 33%. Alongside this, if its turnaround continues and Debenhams records a rise in earnings of 7% per annum (i.e. in line with the growth rate of the wider market) over the next six years, its shares could be trading 100% higher than their present level.
In for a pound
Meanwhile, Poundland (LSE: PLND) also has scope to double in value. Although disposable incomes in the UK are rising in real terms, ‘pound shops’ look set to remain a feature of UK shopping habits. This is reflected in Poundland’s forecasts for the next two years, with the company expected to record a rise in net profit of 55% in the next financial year and a further rise of 20% in the following year.
If Poundland maintains its current P/E ratio of 17.7 then this earnings growth would be enough to push its shares higher by 86%. And with there being the scope for further expansion and profit growth over the following years, Poundland’s share price could at least double, while its dividend also has scope to rise and make its current yield of 3.3% even more appealing.
