The Motley Fool

Are AO World PLC, Kingfisher plc And Thorntons plc The Perfect Partners For WM Morrison Supermarkets PLC In Your Portfolio?

While the last year has been a tough one for investors in Morrisons (LSE: MRW), with the company’s shares falling by 8%, a number of other consumer related stocks have also seen their share prices struggle to gain ground.

For example, electrical goods company, AO World (LSE: AO), has seen its share price slump by a whopping 47% due to a profit warning, while chocolate manufacturer, Thorntons (LSE: THT), has delivered rather mixed financial performance and seen its share price slump by 6% during the period. Meanwhile, B&Q owner, Kingfisher (LSE: KGF), is up just 1% despite an improvement in its medium-term outlook.

Improving Outlook

However, looking ahead, all four companies have considerable potential to post much-improved performance for their investors. For starters, the consumer goods and retail space is set to benefit from an improving outlook for UK consumers, with disposable incomes set to rise at a faster rate than inflation for the first time in a number of years. This should not only lead to better sales and profitability figures, but should also cause investor sentiment in consumer-focused stocks to improve in 2015 and beyond.

In addition, the earnings outlooks and valuations for the four companies are relatively positive. Of course, Morrisons is experiencing a challenging period due to the UK supermarket going through a major transitional period that is seeing large, out-of-town shopping centres become less popular, with shoppers now favouring convenience stores and online. Looking ahead, this trend is set to continue and, with Morrisons being behind many of its major rivals in these two growth areas, it still has a lot of catching up to do.

However, with its bottom line set to rise by 20% next year, Morrisons has a brighter future than currently appears to be being priced in by the market and, with a price to earnings (P/E) ratio of 15.9, offers upside potential.

Other Options

The same can be said of AO World, Thorntons and Kingfisher. All three companies offer excellent growth prospects at a very reasonable price with, for example, AO World’s bottom line expected to bounce back strongly next year following this year’s disappointing performance. Similarly, Thorntons is forecast to post earnings growth of 43% in financial year 2016 after a tough year and, with the two companies trading on price to earnings growth (PEG) ratios of just 0.1 (AO World) and 0.3 (Thorntons), they seem to offer very wide margins of safety so that even if their forecasts are downgraded, their share prices may still rise at a rapid rate.

Meanwhile, Kingfisher is set to benefit from an improving outlook for the French as well as UK economy (around 40% of its business is derived from France), with the ECB’s quantitative easing strategy set to boost the economic performance of the region. And, with Kingfisher expected to post a 9% rise in its bottom line next year, its P/E ratio of 17.2 appears to indicate upside in the company’s share price.

As such, and while Morrisons appears to be a strong buy at the present time, teaming it up with the likes of AO World, Thorntons and Kingfisher could be a sound move.

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Peter Stephens owns shares of Kingfisher and Morrisons. The Motley Fool UK owns shares of Thorntons. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.