Shares of the UK’s third-largest food retailer Wm Morrison Supermarkets (LSE: MRW) rose by 3% this morning, after the group reported strong festive trading.
Morrisons’ like-for-like (LFL) sales excluding fuel rose by 2.8% over the 10 weeks to 7 January. Retail performance was particularly strong, with LFL sales up 2.1%, beating City forecasts for LFL growth of 1%.
Rival Tesco believes there are opportunities in the wholesale market and recently completed the acquisition of FTSE 250 wholesaler Booker Group. This will dramatically expand Tesco’s penetration into the convenience store market and allow it to make inroads into the restaurant sector.
Morrisons CEO, David Potts, appears to see the same opportunities. But Mr Potts has taken advantage of his firm’s sizeable food production business to expand its wholesale activities without needing to spend precious cash on acquisitions.
After trials last year, the Bradford-based supermarket is now starting to supply all 1,650 of the convenience stores operated by FTSE 250 firm McColl’s Retail Group. This will give it exposure to this important growth sector without requiring much additional investment.
A long-term buy and hold
Today’s trading statement confirmed the supermarket group’s existing financial guidance for the year ending 29 January. Based on analysts’ consensus forecasts, we can expect adjusted earnings of around 12.2p per share for 2017/18, putting the stock on a forecast P/E of around 19.
That’s certainly not cheap given the tough competition in the supermarket sector. However, these shares offer a reasonable 2.6% yield and I believe the group’s low-cost growth and improving profitability means this could be a good stock to buy and hold.
It could be the right time to buy
The sell-off has left shares in this business priced modestly, on a forecast P/E of about 11. The dividend yield of 4.6% should be covered twice by earnings, providing some protection from a cut.
The big risk is that conditions for the group will continue to worsen, resulting in earnings downgrades. So how likely is this?
A mixed picture
WPP’s revenue rose by 1.7% during the first nine months of the year, excluding the effect of changing exchange rates. However, this figure includes acquisitions made during the period. On a like-for-like basis, revenue fell by 0.7% during the first nine months to 30 September.
Business doesn’t seem to be booming. But nor is it collapsing. The group’s operating margin was unchanged during the first three quarters of last year, and analysts expect after-tax profits to have risen by around 10% to £1,534m during 2017. New business wins were also quite strong during the first nine months of last year.
Financially, the advertising giant’s performance has remained fairly strong. One particular attraction is the trailing price/free cash flow ratio of 11, highlighting strong cash generation.
On balance, I believe WPP’s modest valuation and market-leading scale could be a buying opportunity. I’m considering buying a few shares for my own portfolio.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Booker. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.