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WM Morrison Supermarkets plc, Aviva plc And Wolseley plc: Recovery Or Dead Cat Bounce?

Today’s rebound in the shares of Morrisons (LSE: MRW), Aviva (LSE: AV) and Wolseley (LSE: WOS) has given investors some hope that a recovery is due. But to find out whether recent gains signify the beginning of a recovery, or represent little more than a dead cat bounce, investors need to take a look at whether the fundamentals have changed.

Morrisons

Today Sainsburys (LSE: SBRY) surprised the market by announcing that it now expects full-year underlying pre-tax profits will be “moderately ahead” of market expectations of £548 million. The unexpected improvement in the expectations of the supermarket’s profitability has been taken by the market as confirmation that trading conditions in the grocery sector is beginning to improve. Morrisons’ shares gained 6.2% on the news.

Although the worst of it seems to be over, market conditions remain challenging. Sainsbury’s same-store sales continues to decline, falling 1.1% in the second quarter. However, this was not as bad as many analysts had expected, and an improvement on the 2.1% decline in the preceding quarter.

Morrisons, which saw sales growth recover into positive territory earlier in the year, is seeing its sales decline again, dashing hopes that the supermarket was bound for a V-shaped recovery. Morrisons’ total sales in the 12 weeks to 16 August fell 1.1%, compared to Sainsbury’s gain of 0.1%, according to data from Kantar Worldpanel.

Although the outlook for the sector does appear to be picking up, investors should be prepared for more disappointment in the short- to medium-term. Only earlier this month, Morrisons announced a 35% decline in underlying pre-tax profits. This should serve as a warning that, although trading conditions may be beginning to ease, earnings will not bounce back that easily.

Competition remains tough, margins are weak, and food deflation is putting pressure on both its top-line and bottom-line performance. Valuations are not particularly attractive either, with shares in Morrisons currently trading with a forward P/E of 16.4 and a prospective dividend yield of 3.4%.

Aviva

Shares in Aviva have gained 5.3% today, following the announcement of better-than-expected first half results from rival insurer, Saga (LSE: SAGA). Slower growth in Europe, legacy liability issues and government reforms to pensions has meant Aviva’s record on earnings growth has been relatively underwhelming compared to rivals in its sector.

But although Aviva’s record on growth is unimpressive, the insurer has been showing significant improvement in profitability. Operating profits increased 9% in the first half, to £1.17 billion. On top of this, valuations are very attractive, with shares trading with a forward P/E ratio just 9.6 and a prospective dividend yield of 4.6%.

Wolseley

Shares in building materials company Wolseley fell 12.5% yesterday, following the cut in its outlook on revenues for the rest of this year. Today, its shares have rebounded 5.4%, but the rise does not seem warranted given its pricey valuation.

It now expects like-for-like sales will grow 4% in the first half of its 2015/6 financial year, a decrease from its previously guided figure of 6%. This is primarily due to slowing growth from industrial customers, particularly from the oil and gas sector. But, increasing competitive pressure in the UK and the rest of Europe will likely compound its woes, by reducing revenues and hurting margins.

This should mean that Wolseley’s double-digit earnings growth rate would no longer be sustainable. And if earnings growth slows, Wolseley would struggle to justify its forward P/E of 17.4.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.