Why Wm. Morrison Supermarkets plc Is A Poor Value Stock Selection

Royston Wild looks at whether Wm. Morrison Supermarkets plc (LON: MRW) is an attractive pick for value investors.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In this article I am looking at why I believe the risk attached to Wm. Morrison Supermarkets (LSE: MRW) continues to outweigh potential rewards.

Price to Earnings (P/E) Ratio

Morrisons has taken a variety of measures to arrest hoardes of shoppers heading out of its doors, from introducing hundreds of Morrisonsprice cuts and refurbishing scores of its supermarkets through to entering the online shopping space back in January. But such ideas continue to fail badly, and latest Kantar Worldpanel statistics showed market share fall to 10.9% in the 12 weeks to May 25 from 11.6% in the corresponding 2013 period.

Based on current earnings forecasts Morrisons currently changes hands on P/E ratings of 14.8 and 12.9 for the years concluding January 2015 and 2016 correspondingly. These figures lag the value benchmark of 10 times earnings or below, a standard which I believe would fully reflect the upheaval facing the firm.

Price to Earnings to Growth (PEG) Ratio

Morrisons’ earnings have steadily declined in each of the past five years, as the effect of rising competition and restrictions on customers’ pursestrings has eaten into revenues. This pressure culminated in an 8% earnings dip last year, the first annual fall for many moons, and analysts expect things to get a whole lot worse, with a colossal 48% dive predicted for fiscal 2015. A 15% recovery is anticipated in 2016.

Naturally, this year’s anticipated fall results in an invalid PEG rating, although 2016’s meaty rebound at least creates a readout of 0.9 — any reading below 1 is generally considered exceptional value.

Market to Book Ratio

After subtracting total liabilities from total assets, the supermarket’s book value is revealed at some £4.7bn. This figure leaves a book value per share of £2.02 which, in turn, results in a market to book ratio of 1. This is bang on what is generally considered very good value.

Dividend Yield

Despite a backcloth of mounting earnings pressure the supermarket has managed to keep its progressive dividend policy on track, but brokers do not expect this phenomenon to reign for much longer. Morrisons is expected to tentatively lift the full-year payment to 13.2p per share in fiscal 2015 from 13p last year, although a cut to 12p is widely expected.

Still, these prospective payments carry gargantuan yields, with figures of 6.5% and 6% for 2015 and 2016 respectively smashing the FTSE 100 forward average of 3.2%. These readings also comfortably surpass a forward average of 2.6% for the entire food and drug retailers sector.

Leave Market Laggard On The Shelf

Considering the intensifying industry pressures facing Morrisons, I believe that the firm is an extremely poor stock choice. The chain’s transformation strategy continues to struggle to gain traction, a situation still not fully factored into the share price and which is likely to get worse as budget retailers pull shoppers away from its checkouts.

With a backdrop of enduring earnings pressure also likely to weigh on dividend growth, I believe that much more lucrative — and less risky stocks — can be found elsewhere.

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.

Royston does not own shares in Wm. Morrison Supermarkets. The Motley Fool has recommended shares in Morrisons.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »