Over the past two years, Wm Morrison Supermarkets (LSE: MRW) has staged a dramatic comeback. After slumping to low of around 140p towards the end of 2016, the stock is now changing hands for roughly 265p.
Excluding dividends, over the past two years, shares in the retailer have outperformed the FTSE 100 by approximately 27%.
However after this rally, it looks to me as if shares in the UK’s fourth largest supermarket group are overstretched. Today, I’m looking at one stock that could be a better alternative to add to your portfolio.
For 2014 and 2015, Morrisons reported losses of around £1bn, causing investors to flee from the company. In 2016, profits returned and ever since the firm’s finances have been steadily improving. After reporting net income of £222m in 2016, analysts are forecasting a net profit of £310m for this financial year, rising to £337m for fiscal 2020.
There’s no denying Morrisons’ management has been working flat out to turn a business around, and those efforts have certainly paid off. But it looks to me as if the share price has gotten ahead of itself.
Indeed, right now shares in the retailer command a premium valuation of 20.6 times historic earnings and 20.3 times forward earnings. In my view, the company doesn’t deserve this valuation. Profits have returned, but it’s still a low margin retailer operating in a fiercely competitive sector with a dividend yield of only 2.7%. With this being the case, I would avoid the Morrisons share price.
One company that might be a better buy is McColl’s Retail (LSE: MCLS).
Time to focus on growth
In some respects, it seems to me as if McColl’s today is much like Morrisons was three years ago. For the 13 weeks to the end of August 26, like-for-like sales across the group declined 0.9%, a dip management blames solely on the “supply chain disruption following the failure of Palmer & Harvey,” the cigarette wholesaler that collapsed last year.
As well as the supply chain disruption, management has also been preoccupied with the rollout of a Morrisons supply deal across its store portfolio.
Completed in the middle of August (ahead of schedule), the rollout has stocked McColl’s stores across the country with branded products and Morrisons’ own Safeway brand. When initially announced, management declared the supply deal a “groundbreaking” deal that would “enable us to provide our customers with the highest quality fresh food.“
Now that the rollout has been completed, and the disruption from the collapse of Palmer & Harvey is starting to tail off, I’m excited to see what the future holds for the McColl’s group.
After a mixed 2018, growth is expected to return in 2019 and, right now, you can get your hands on shares in the retailer for a P/E of just 8.6. There’s also a dividend yield of 7.1% on offer. I reckon the stock could wake up this year as management re-focuses on growth after a year of change.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended McColl's Retail. 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.