Is the Morrisons share price a bargain, or should I buy this other FTSE 100 dividend stock?

Roland Head reveals whether FTSE 100 (INDEXFTSE:UKX) retailer Wm Morrison Supermarkets plc (LON:MRW) is in his shopping trolley.

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This morning’s news that third-quarter sales at Wm Morrison Supermarkets (LSE: MRW) rose by 6.4% was met with a 5% slump in the share price.

Why the glum response? The numbers look okay to me. I think there’s a chance that the market is over-reacting to the expected slowdown in store sales that’s followed a long summer and the football World Cup.

Today, I’m going to take a fresh look at Morrisons and consider another strong performer from the FTSE 100.

Wholesale boost

Morrison’s like-for-like sales rose by 5.6% during the 13 weeks to 4 November, excluding fuel. However, this top-level figure masks a big divide between retail and wholesale growth.

Retail store sales only rose by 1.3% on a like-for-like basis, compared to the same period last year. The remainder of the firm’s sales growth was provided by its wholesale business, which recorded a 4.3% increase in like-for-like sales.

Wholesale growth is being driven by contracts to supply convenience stores operated by McColl’s, Rontec, Sandpiper and MPK Garages. In total, Morrisons will soon supply more than 1,700 convenience stores, without the risk of owning or operating these shops.

In my view, this wholesale operation gives the retailer an edge over rivals. Excess capacity in its food production business can be used to supply other retailers, lifting the group’s overall profits without requiring much investment.

Is the price right?

There was no word on profit margins in today’s trading statement, so it should be fair to assume that management anticipates full-year profits to be in line with expectations.

Analysts’ forecasts suggest adjusted earnings will rise by 8% to 13.2p per share this year, with a dividend of 8.1p. At the time of writing, this puts the stock on a forecast P/E of 18, with a prospective yield of 3.4%. In my view, that’s a fair valuation for a good business. If I was a shareholder, I’d be happy to continue holding.

Another successful turnaround

Morrison’s turnaround under chief executive David Potts has impressed me greatly. Another FTSE 100 dividend stock that’s also delivering an impressive recovery from recent problems is educational publisher and training group Pearson (LSE: PSON).

While stock markets were selling off in October, this firm’s shareholders received an unexpected boost. Adjusted earnings guidance for the current year was lifted from 49p-53p per share to 68p-72p per share.

I should point out that this 30%+ increase isn’t the result of a sudden surge of growth. Adjusted operating profit guidance for the year is unchanged, but lower-than-expected tax and finance costs mean that after-tax earnings will be higher.

This highlights a key reality of investing in big businesses — financial engineering is often one of the main drivers of earnings growth.

Would I buy Pearson?

Selling course books and eBooks remains a tough business, with sales flat during the third quarter. Luckily, Pearson’s online training division performed better, with global course registrations up by 13%.

The firm says that plans to deliver £300m of annual cost savings by the end of 2019 are on track. Analysts’ forecasts place Pearson stock on a 2018 forecast P/E of 15, with a prospective yield of 2.1%. This looks fully-priced to me given that underlying earnings are expected to be flat in 2019. I’d rate the stock as a hold only at this level.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended McColl's Retail. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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