It?s been an exceptionally difficult month for investors in the UK supermarkets, with the news of Tesco?s (LSE: TSCO) overestimation of profit bringing its shares, and those of its peers, down by a considerable amount.
Indeed, shares in Tesco have fallen by 17% in the last week alone, while those of Wm. Morrison (LSE: MRW) are down 7% in the same time period. Does this mean, then, that Wm. Morrison is no longer worth buying, or is weak sentiment the perfect opportunity to add…
It’s been an exceptionally difficult month for investors in the UK supermarkets, with the news of Tesco’s (LSE: TSCO) overestimation of profit bringing its shares, and those of its peers, down by a considerable amount.
Indeed, shares in Tesco have fallen by 17% in the last week alone, while those of Wm. Morrison (LSE: MRW) are down 7% in the same time period. Does this mean, then, that Wm. Morrison is no longer worth buying, or is weak sentiment the perfect opportunity to add the company to your portfolio?
With shares in Wm. Morrison trading at a nine-year low, they are current on a staggeringly low valuation. For example, Wm. Morrison’s current share price of 170p is 15% below its per share book value of 201p. This shows that, while the company is undoubtedly struggling with its top and bottom lines, investors are able to buy £1 of net assets for around 85p which, for value investors, is hugely appealing.
However, where Wm. Morrison lacks appeal is with regard to its short term growth potential. It (alongside Tesco) continues to see its market share hit by no-frill discount supermarkets such as Aldi and Lidl, which are having a hugely detrimental effect on its bottom line. For example, earnings are set to fall by 51% in the current year and, while next year is forecast to be much better, a rise of 8% is still only just above the wider index average growth rate.
Despite this, the longer-term future could be much brighter for Wm. Morrison. That’s because it is focusing on growing its convenience store offering, as well as its online grocery service. Both of these areas continue to offer strong relative growth for the sector and, with Wm. Morrison having had no exposure to them until this year, they could make a significant contribution to the company’s bottom line moving forward.
Clearly, the UK supermarket sector is going through a highly challenging period. However, the disappointment of Tesco’s guidance misstatement seems to have pulled down peers such as Wm. Morrison to an extent that is perhaps unjustified. Certainly, both companies are struggling, but Wm. Morrison has online and convenience store growth to come, with shares in the company being priced to sell.
As a result of this, now could be a good time for long term investors to buy in to Wm. Morrison, although there are likely to be a number of lumps and bumps along the way.
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Peter Stephens owns shares in Tesco and Wm. Morrison. The Motley Fool owns shares in Tesco.