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Wm. Morrison Supermarkets plc — A Lesson In Value Investing

Right now Wm. Morrison Supermarkets plc (LSE: MRW) (NASDAQOTH: MRWSF.US) is one of the most attractive looking value opportunities within the FTSE 100. However, many investors are afraid to take the plunge and buy in because of the risks involved.

Indeed, right now Morrisons’ future looks bleak, as the company struggles to compete with peers and sales slump. Further, as the UK grocery sector becomes ever more competitive, it’s hard to try and predict if, let alone when, Morrisons will stage a turnaround. 

Nevertheless, value investing is about taking calculated risks, when the company’s share price significantly undervalues the underlying business. It’s not for everyone, and it requires patience, but value investing can be extremely lucrative. 

Turnarounds takes timemorrisons

Now, you may be asking, why is Morrisons undervalued at current levels? The answer lies within the company’s balance sheet — specifically, the value of the company’s property.

You see, Morrisons owns many of its own superstores, the total value of which is in the region of £9bn, £4.5bn more than the company’s current market value. Further, Morrisons is currently trading at its book value — the total value of the company’s assets, minus liabilities.

What does this mean? Well, with nearly £9bn of property on its books, Morrisons could sell up, pay off all of its long-term debt and the company would still have £7bn of cash to play with  — that’s around £3 per share.

That’s a huge financial cushion for Morrisons to have in place.

Nerve-racking

Still, buying into a struggling company like Morrisons can be a nerve-racking experience, especially since the company’s share price has fallen around 24% so far this year.

However, value investors need to be patient when it comes to investing and focus on the underlying value, not the share price, despite short-term declines.

There is also Morrisons’ attractive dividend yield, which currently sits at 6.9% — and management has stated their commitment to the payout for the next two years. Actually, even if the payout were slashed by 50% (which looks likely) the company would still yield 3.5% at current levels, around the same as the wider FTSE 100. 

Foolish summary

In conclusion, at present levels, Morrisons’ share price is below the value of the property on the company’s books, making the company look like a great value investment. However, investors need to be patient as Morrisons’ turnaround will take time.

With this in mind, investors hunting for value in Morrions need to concentrate on the value of the company’s assets and ignore short-term share price declines — over the long-term the market should begin take note of the value hidden within Morrisons’ balance sheet.

Risky business

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Rupert owns shares in Wm. Morrison Supermarkets plc. The Motley Fool has recommended shares in Wm. Morrison Supermarkets plc.