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Former WM Morrison Supermarkets PLC Chairman Supports J Sainsbury plc’s Turnaround

It emerged today that Ken Morrison, the former chairman of Morrisons (LSE: MRW), has spent £6m building a stake in Morrisons’ rival Sainsburys (LSE: SBRY)

Sir Ken Morrison has also given his backing to Mike Coupe, the chief executive of Sainsbury’s. According to a report in The Times, Sir Ken and his son, William started acquiring shares in Sainsbury’s last year and now own a combined stake of £11.9m. 

The revelation that Sir Ken is betting on the success of Sainsbury’s over Morrisons should come as no surprise to investors. Indeed, back in June last year, he spoke out against Morrisons’ strategy at the company’s AGM. 

Directionless

Sir Ken Morrison — former chairman and now Life President of Morrisons — transformed his father’s small business into the UK’s fourth largest supermarket and guided the company for more than 50 years.

Sir Ken retired as chairman in 2008, but returned to the media spotlight last year, when he blasted Morrisons’ management at the company’s AGM. The former chairman told the current board that the group’s losses were disastrous and the company had failed to run its core supermarkets correctly:

I personally thought they [the results] were disastrous. I warned in 2009 and 2012 that changes being implemented by directors would seriously damage the business … [my comments] were absolutely right and today we have seen the consequences.”

It’s now emerged that a few months before Sir Ken made these comments he was buying shares in Sainsbury’s. So it’s clear which company the retail veteran believes is best positioned to navigate the UK’s turbulent retail market. 

The right choice

Sir Ken seems to have made the right choice betting on Sainsbury’s. In the  year to date the company’s shares are up 6.3%, outperforming Morrisons’ shares by 24% — excluding dividends. 

Morrisons’ troubles have been well publicised. The retailer has struggled to fend off competition from discounters Aldi and Lidl, as well as price-cutting by larger rivals. Profits have collapsed, the group has been forced to sell its loss-making convenience store portfolio, and the dividend has been cut.

Unfortunately, it doesn’t look as if things are going to get any better for Morrisons any time soon. The company is facing multiple pressures in the form of food deflation, which is currently running at a rate of -2.5% per annum, increasing competition from the likes of Aldi and Lidl, and higher costs due to the introduction of the government’s national living wage next year. City analysts expect Morrisons’ earnings per share to contract 16% for the year to 31 January 2016, and the company is trading at a forward P/E of 16. As a result, the company’s shares could have further to fall. 

Sainsbury’s is facing the same pressures as Morrisons, and analysts expect the company’s earnings per share to also fall 16% next year. However, unlike Morrisons, Sainsbury’s shares are trading at a relatively undemanding forward P/E of 11.3, implying that there’s less room for them to fall if things don’t go to plan. 

Hidden gem

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Rupert Hargreaves 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.