The problems facing UK grocers have been well documented, and Morrisons has often been treated as the least fashionable public company in what is, for now, the least fashionable industrial sector.

Yet, beneath all the negative sentiment, Morrisons (LSE: MRW) actually displays some promising investment characteristics. At least more so than Tesco (LSE: TSCO) – the market leader that has so often put it in the shade in the past.

Morrisons – Better Than The Rest?

While Tesco can’t seem to find an end to all the bad news and Sainsbury’s is eerily quiet (for now), Morrisons has taken the painful but necessary path of ditching all of its bad news in one fell swoop. It has faced up to the structural issues facing UK grocers, and has also specified how it aims to combat a perfect storm of threats to the industry.

Management intends to free up some £1bn of cash over the next three years via property sales and cost-cutting – a decisive strategy that should close the price gap with discounters, which have seen their market share surge in recent times. The freeing up of this cash has also allowed it to raise its dividend by 5%. Compare this with Tesco reducing its own by 75% over the same period.

On The Front Foot

Morrisons is beginning to see the benefits of these changes and its core business should improve thanks t0 revamped operating systems, while its current price cuts and promotions are the first of many over the next few years.

The company is belatedly expanding its convenience store footprint and online offering, suggesting that, while it has lost ground to rivals in these areas, there could also be easy gains going forward as it learns from the strategic execution of its peers. There is also a Morrisons card launch in the works – potentially a valuable asset in these days of Big Data collection and flagging customer loyalty.

Strategic Assets

Morrisons owns 90% of its stores. As mentioned above, it will partially fund its price cutting spree by selling some of these. Tesco, on the other hand only owns around half of its store portfolio, and so the sale of property is a much less viable strategy in funding its own price cuts.

Not only can Tesco not sell so many assets at a time when it desperately requires funds, it also has much higher lease commitments. While Morrisons’ lease obligations are £862m, Tesco needs to shell out a whopping £11.3bn in rent – some 46% of its adjustable debt.

Furthermore, Morrisons now has a stronger profit margin than Tesco and is cheaper on a debt to EBITDA basis.

Conclusion

Considering these factors, it is easy to conclude that Morrisons is the better-placed of the two retail giants. Tesco has much more to do and much more to lose than its oft-neglected peer. However, while Morrisons has a clear strategy and a bumper dividend, earnings visibility in the sector must improve before this share can be anything other than a speculative bet.

The post Is Wm. Morrison Supermarkets plc Due A Re-Rating? appeared first on The Motley Fool UK.

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Jack Brumby has no position in any shares mentioned. The Motley Fool UK has recommended Tesco. The Motley Fool UK owns shares of 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.

BP

Despite consistently posting revenues of close to £400bn a year, in recent times its share price has played the part of ‘story stock’ rather than FTSE 100 stalwart.

Trading on a PER of 8.8x, the company finds itself trading at a considerable discount to the FTSE 100 average of 12.8x. Not only does it stand at a significant discount to the FTSE average, it also trades at a slight discount to peers and to its own book value. Bearing these factors in mind, we discuss the potential for an upwards re-rating of BP shares in the short term.

The Bad – Deepwater Horizon and Rosneft…

BP’s woes have been well documented in recent years. The oil major’s recent depressed share price and underperformance relative to the market can, unsurprisingly, be traced back to the 2010 Macondo oil spill. Since 2010, BP shares have averaged as much as 27% below their pre-Deepwater Horizon peak of 650p.

The company is in the middle of a large and messy legal saga, attempting to hammer out the total costs and compensation of the oil spill. Even though BP has set aside more than $42bn for legal costs, this figure could continue to climb in years to come. The company should have enough firepower to absorb ongoing litigation costs without compromising its balance sheet.

For those minded to disagree, we would point to BP’s almost unrivalled billions in annual revenue and profit figures.

However, BP has still had to restructure its business in light of its changed situation in the US. It has had to sell many of its non-core assets, including its natural gas operations in Canada and investments across the US, the UK and other countries.

Another cloud on the horizon is BP’s 19.75% stake in Russia-based Rosneft. Management see the stake as an essential cog in its long-term success plan, and so any investors hoping that this asset might get sold off will be disappointed. More likely, BP and Rosneft will batten down the hatches and wait for the geopolitical turmoil to blow over.  

The Re-Rating?

As mentioned above, BP is still a massive, global oil supermajor. In 2013, it registered $21bn of operating cash flow and $5.4bn in dividends. In beating the company with well-known sticks such as the oil spill and its Russian connections, investors often ignore BP’s world-class assets.

As of 2013, BP produces 3.2 million barrels of oil per day, has a total proven reserve of 17.9 billion barrels, and owns 17,800 service stations. Although its largest division is BP America, operations span 80 countries and include considerable stakes in foreign giants as Rosneft. The company is also involved in exploring renewable energy sources: specifically, it has worked in solar power, biofuels, and wind power.

Conclusion

On balance, investors appear to focus more on the well-known negatives of the BP investment case than its under-appreciated positives. As a long-term investment, BP looks a buy with a strong and well-protected dividend – but don’t be surprised by short and mid-term turbulence due to geopolitics and public sentiment.

The post Is BP plc Due a Re-Rating? appeared first on The Motley Fool UK.

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

Tesco

But Tesco is still a massive company. It has a market cap of £14.45bn, and is one of the largest retailers on the planet both in terms of revenue and profit (assuming it hasn’t misstated any more of this number…). Investors are fleeing the group and the selling pressure continues.

Currently hovering above 52-week lows and on a PER of 7.5x, we ask if this discount to historical PER is justified, and whether the former FTSE darling is due a re-rating.

The Story So Far…

It’s been a rough few years for the retail giant. By the time it was discovered that Tesco Value burgers got their ‘value’ by virtue of being 29% horsemeat in 2013, its sales had already been declining for years as deep discounters Aldi and Lidl ate up market share.

Fast forward to October 2014, and the potent mix of PR scandal and market-taking, disruptive competition sounds much the same as it did a year ago. Just substitute ‘horsemeat’ with ‘£250m profit misstatement’. Or ‘ongoing FCA investigation’.

This inquest could be damaging both in terms of what it unearths, and the manner in which it might compromise operational efficiency at a time when robust and flexible management is needed. Furthermore, Kantar data indicates that Aldi and Lidl continue to take market share.

Tesco has lost more ground than either Sainsbury’s or Morrisons. Nothing has arrested this trend and it is still too early for any strategic or tactical changes to make a difference.

Going Forward

As mentioned above, Tesco is the largest UK operator by some distance. The notion that bigger companies take longer to react to changing market conditions rings true here. This supermarket giant over-expanded in its glory days so it could keep the growth story going.

With restaurants to run and overseas stores to operate, in addition to its core UK business, Tesco may have too much on its plate at present to respond quickly to new developments. When this is considered alongside the FCA investigation, and the potential this brings for work disruption, it begins to look doubtful as to how well Tesco can react to events and keep pace with its peers.

This drives the case for the sale of selected assets. Tesco has so far rebuffed advances for its data analytics division and there are rumours of hedge funds sizing up Asian assets – such a sale could free up cash and allow management to focus more on the core UK retailing business.

Conclusion

All things considered, Tesco is cheaply rated at a PER of 7.5x for a reason; structural changes, sterner competition, protracted price wars (which may have significantly further to go), accounting scandals, food price stagnation, and diminishing fundamentals have all justified its current share price malaise.

Although performance might pick up on changing market sentiment alone, structural change continues apace, and it would be risky to buy shares until there is more earnings and performance visibility in the sector.

Tesco was once regarded as a safe long-term investment and a solid choice for dividend income. This may yet prove to be true in the future, but certainly for the short to medium term, these shares are a speculative risk.

The post Is Tesco PLC Due A Re-Rating? appeared first on The Motley Fool UK.

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Jack Brumby has no position in any shares mentioned. The Motley Fool UK owns shares of 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.

Sainsbury’s

Its share price has been dragged down alongside Tesco‘s (LSE: TSCO) and Morrisons‘ (LSE: MRW), and it could be argued that negative sentiment regarding the sector as a whole has unfairly hampered Sainsbury’s share price performance.

Yet it could also be argued that the structural headwinds facing UK grocers — think aggressive, well-funded European competition, food price stagnation and protracted price wars — are simply too much for good management alone to make much of a difference over the next year.

The Best Of A Bad Bunch?

Sainsbury’s has arguably been seen as the pick of the UK grocers. It is perceived to have a more upmarket consumer base to its peers, which is better protected from Aldi and Lidl’s current UK market share raid. This sentiment only partially holds up to data.

The latest Kantar Panel findings show that Sainsbury’s share of the market fell by 0.4% to 16.2% during the 12 weeks to 14 September — significantly better than Tesco’s 1.4% slide to 28.8% of the UK market. However Aldi, Lidl, Asda and Waitrose actually grew their market share over the same time-frame, while Morrisons and The Co-operative fell by less. This raises questions concerning the assumption that Sainsbury’s market share is better protected than its rivals.

True, it has a strong presence in the South of England, while the discounters are focusing on northern regions (for now). Management must also be commended for the timely expansion of convenience stores and its online offering, at least by the standards of the industry as a whole. The same can be said of its smart joint venture with Danish discounter Netto, which will see the launch of 15 new Netto stores by the end of 2015.

Rights Issue Rumours

As soon as Morrisons announced its price-cutting strategy in a bid to tempt consumers back from Aldi and Lidl, Sainsbury’s and Tesco had to follow suit. There are consequences to price wars of this nature, however.

Cutting prices often requires a re-basing of earnings forecasts, as consumers initially buy the same amount or even more while actually spending less. The rationale is that word will get out of the supermarket’s low prices and, eventually, more consumers will shop there for the bargains. Increased consumer volume ends up trumping reduced average spend.

This does beg the question of how supermarkets take the painful initial hit to bottom-line profit of such extreme tactics. Morrisons dutifully re-based its earnings targets and warned over expected lower margins, freeing up billions to fund its price cutting campaign. Tesco has slashed its dividend.

As for Sainsbury’s, there have been persistent rumours of a rights issue, but nothing has happened yet. There is more to come here, and it may not be positive. The situation in the UK grocery sector may well be bearish for a while. Although these shares only sit on a PER of 7.5x, earnings visibility has been markedly reduced by competition and price cuts — and as such, they are for now uninvestable.

The post Is J Sainsbury plc Due A Re-Rating? appeared first on The Motley Fool UK.

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Jack Brumby 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.

It is no secret that we have been on a bull run since 2009. Some investors are nervous, and a lot of shares are too pricey right now (ARM, I’m looking at you). However, pockets of good value can still be found – it just requires a bit more digging than it did three or four years ago.

International mining company Rio Tinto (LSE: RIO) (NYSE: RIO.US) may be one of those more appropriately valued shares. What’s more, it is frequently cited by brokers as their top pick in the mining sector due to its scale, infrastructure and competitive moats.

Currently sitting on a rolling price/earnings ratio of just 9.5 (compared to its historical P/E of 11.7), and paying a progressive and well-covered dividend yield of around 4%, I’d suggest that the mining company is due a rerating over the short to medium term.

What Iron Ore Problem?

Rio’s core iron ore business has gone from strength to strength in recent times, with robust divisional management and prudent cost-cutting initiatives helping the bottom line. Impressive, considering iron ore prices recently touched a five-year low of $78.60 per ton.

The low-cost nature of Rio’s iron ore business naturally protects it from falling prices, turning tough conditions into something of a positive – if prices continue to drop, higher-cost operators will leave the market, meaning that when the upswing comes Rio will be there to pick up the pieces with reduced competition.

The division recently recorded another record quarter in its iron ore division, with production rising 5% and shipping up a considerable 18%. Although prices may continue to fall, Rio has enough in its arsenal to navigate those waters safely.

Glencore Rebuffed

This strong performance at a relatively cheap valuation has not gone unnoticed. Earlier this month it came to light that Rio management had rebuffed a merger approach from fellow miner Glencore. The resulting entity would have been the largest miner in the world. Rio management concluded that the proposed deal would not be in the best interests of its shareholders, and so they walked away.

Two positives can be drawn from this conclusion:

• Rio’s management are confident in their turnaround strategy and are focusing on shareholder. As chairman Jan du Pleiss elaborated on the decision:

“The board believes that the continued successful execution of Rio Tinto’s strategy will allow Rio Tinto to increase free cash flow significantly in the near term and materially increase returns to shareholders.”

• Even if the market has forgotten that Rio is a good company, its rivals, who arguably understand it better than anyone, have not.

So to my mind, Rio looks to be both a good short-term and long-term investment and its current share price represents an attractive entry point.

The post Is Rio Tinto plc Due A Re-Rating? appeared first on The Motley Fool UK.

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Jack Brumby owns shares in Rio Tinto.