Is Wm. Morrison Supermarkets plc Set For Electrifying Earnings Growth In 2014?

Today I am outlining the earnings prospects of beleaguered supermarket chain Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) for the coming year.

Tough competition set to last

Make no mistake: Morrisons has failed to effectively address the persistent attack of budget retailers on the mid-table supermarket space. Despite the introduction of aggressive pricing initiatives, and attempts to improve the quality and reputation of its in-house brands, revenues continue to erode as consumers stash their shopping in its rivals’ trolleys.

Indeed, Kantar Worldpanel statistics released this week showed that half of all British grocery shoppers frequented either Aldi or Lidl in the 12 weeks to December 9 — a record for any three-month period. These outlets are obviously enjoying accelerating success due to their rock-bottom prices, but the successful development of their luxury lines more recently is also proving popular with shoppers.

And while these two retailers saw their market share rise to a record 4% and 3.1% in the latest 12-week period, up from 3.2% and 2.8% respectively at the same point in 2012, their assault on the grocery sector’s middle ground pushed Morrisons’ take of the market 30 basis points lower to 11.6%.

Still, the troubled supermarket is hoping to grab share back from these new entrants through the launch of its online presence next month, developed in tandem with internet shopping specialists Ocado. Retail research house IGD expects online grocery shopping to surge 124% over the next five years, making it a potentially lucrative avenue for Morrisons in future years.

City brokers expect continued sales pressure at Morrisons to culminate in the first earnings slip since 2009 for the year ending January 2014, with a 9% drop, to 24.7p per share, anticipated. But earnings are expected to nudge up 4% in the following 12-month period,to 25.7p.

Such projections leave the supermarket dealing on P/E ratings of 10.7 and 10.3 for these years, just above the value benchmark of 10 times predicted earnings.

Still, in my opinion Morrisons’ meagre price rating is fully warranted. Not only is the breakneck momentum of its lower-price rivals is set to keep rolling well into 2014, but its mid-tier rivals like Tesco and J Sainsbury — veterans in the online shopping space — will hamper the success of its fledgling website in January. With all of the middle ground also competing aggressively in the convenience space, Morrison will also struggle to make much progress here.

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Despite its insipid earnings outlook, Morrisons is still a popular pick for income investors owing to its exceptional record of on-year dividend increases regardless of earnings pressure. And analysts expect the chain to build last year’s 11.8p per share payout to 12.9p and 13.3p in 2014 and 2015 respectively, payments which would create chunky yields of 4.9% and 5.1% respectively.

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Royston does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco and has recommended Wm. Morrison Supermarkets.