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

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.

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