During the last five years you would have been far better holding shares in Booker (LSE: BOK) or Greggs (LSE: GRG) than in sector peer Morrisons (LSE: MRW). That’s because, while Booker and Greggs have seen their share prices soar by 230% and 114% respectively, Morrisons has endured an awful period, with sales and profitability declining so that its share price is now a third lower than it was five years ago.
Looking ahead, though, could the tables be turned? Or, are Booker and Greggs still much more appealing buys than Morrisons?
Growth Prospects
Both Booker and Greggs have index-beating forecasts. For example, Booker is expected to increase its bottom line by 13% in the current year, and by a further 10% next year, while Greggs is due to see its earnings rise by 12% this year and by a further 8% next year. While impressive, Morrisons has equally appealing growth potential over the same period, with its profit forecast to rise by 8% this year and by 20% next year.
This may be somewhat surprising, since the supermarket sector continues to be a very competitive and challenging space in which to trade. However, with a new management team expected to cut costs, improve efficiencies and rationalise the business, Morrisons looks set to offer equally strong growth potential over the next couple of years when compared to its sector peers.
Valuation
Even though Booker and Greggs do have impressive growth prospects, they seem to be more than priced in to their current valuations. For example, Booker trades on a price to earnings (P/E) ratio of 20.3, while Greggs has a P/E ratio of 21.2. And, while Morrisons has a P/E ratio that is hardly cheap, it trades at a much more appealing valuation than its sector peers, since it has a rating of 16.5.
Furthermore, when their respective P/E ratios are combined with their growth rates, Morrisons looks even more appealing than Booker or Greggs. That’s because it has a price to earnings growth (PEG) ratio of just 0.7, versus 1.9 for Booker and 2.4 for Greggs. As such, Morrisons appears to be the stock most likely to see its share price move northwards over the medium term.
Looking Ahead
Clearly, Morrisons is a less stable business than Booker or Greggs, with it having a new CEO who is ringing the changes in terms of the company’s strategy and personnel. As such, while Booker and Greggs may prove to be more consistent performers moving forward, Morrisons is the one with the greatest potential to deliver capital gains. As such, it appears to be well worth buying at the present time.
