Is It Time To Buy WM Morrison Supermarkets PLC And Direct Line Insurance Group PLC?

Investors expecting more doom and gloom from UK supermarkets may be disappointed.

Shares in Wm Morrison Supermarkets (LSE: MRW) opened 10% higher this morning, after the firm said that like-for-like sales excluding fuel rose by 0.2% over the Christmas period.

The market had been braced for a fall in like-for-like sales (excluding fuel) of up to 2%, based on analysts’ forecasts.

Looking at the figures in more detail, it seems that the sales gains were the result of an increase in like-for-like transaction numbers, which rose by 1.3% during the nine weeks to 3 January. The average number of items per basket fell by 3.6%, which the firm says is the result of running fewer multi-buy discount offers and increased pack sizes for some items.

Behind the scenes changes

All 140 of Morrisons’ M local convenience stores have now been sold and a number of supermarkets have also been closed. Plans were announced today for a further seven supermarket closures.

Financially, the picture is improving. Morrisons is generating a decent amount of free cash flow. As a result, net debt is now expected to be between £1.65bn and £1.8bn at the end of the year, down from original guidance of £1.9bn to £2.1bn.

The firm expects full-year underlying per-tax profits of £295m to £310m. My calculations suggest this should provide earnings of around 9p per share, in line with current forecasts. City analysts expect Morrisons to pay a dividend of 5p per share this year, giving a prospective yield of around 3%. Now could be a good time to buy for a steady recovery.

Direct Line

While Morrisons executives may have been able to relax and enjoy a festive break at Christmas, staff at Direct Line Insurance Group (LSE: DLG) weren’t so lucky. No fewer than three storms, Desmond, Eva and Frank, caused widespread flooding and property damage.

Direct Line said today that having visited 90% of affected customers, it expects claims from the three storms of between £110m and £140m. This is lower than the £150m minimum required for Direct Line to be able to claim on its own insurance, so the group is expected to have to foot the bill for these claims.

Buying opportunity?

Direct Line’s shares have fallen by 10% so far this year, but occasional losses from severe weather are a fact of life for insurance companies. Is the current weakness in Direct Line’s share price a buying opportunity?

The group’s shares currently trade on 13 times 2016 forecast profits. Direct Line’s share price hasn’t moved following this morning’s announcement, suggesting that the claims figures are broadly in line with market expectations.

However, the group’s share price remains 15% higher than at the start of 2015, so the stock isn’t outrageously cheap. I’d say that Direct Line shares look reasonable value over the medium term, although some further weakness is possible.

One big attraction is the shares’ dividend yield. A total payout of 21.5p per share is expected for 2016, giving a prospective yield of 6%. Direct Line could be worth considering as an income buy, in my view.

However, if you're looking for an income stock with turnaround potential, the Motley Fool's analysts believe they've found a more exciting alternative to Direct Line and Morrisons.

The company featured in A Top Income Share From The Motley Fool is a mid-cap UK business with operations in Europe.

The Fool's experts believe this firm's profits could soon start to rise as trading conditions improve. The shares fell heavily in 2015, suggesting to me that a decent rebound is possible.

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Roland Head owns shares of Wm Morrison Supermarkets. 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.