Supermarket share prices have come under pressure since last summer. Brexit fears and tough competition from Lidl and Aldi have pressured profits and growth.
Despite this, Wm Morrison Supermarkets (LSE: MRW) outperformed the FTSE 100 by a comfortable margin over the last year. Its share price has fallen by just 5% over the last 12 months, compared to a 12% drop for the FTSE.
Is this a good time to put more cash into supermarket stocks, or are conditions likely to get worse as 2019 unfolds?
Today’s Christmas sales figures showed that the group’s like-for-like sales rose by 3.6% during the nine weeks to 6 January. However, this solid figure didn’t lift the retailer’s share price, which was down 3.5% at the time of writing.
The reason for this seems to be that this growth mostly came from its wholesale division. Today’s figures show that retail like-for-like sales rose by just 0.6% over the Christmas period. The other 3% growth came from Morrison’s wholesale business, which supplies convenience store chain McColl’s and Amazon‘s grocery service.
Buy, sell or hold?
I’m a big fan of the business’s wholesale expansion, which is allowing it to add growth without requiring costly new stores. Because the company produces much of the food it sells in its own factories, adding sales this way should also help to support higher profit margins.
I’m also keen on the group’s solid balance sheet and attractive 3.9% dividend yield. The only question in my mind is whether the stock is cheap enough to add to my portfolio at the moment. The shares currently trade on 16.3 times forecast earnings for the current year, falling to 15 times earnings for 2019/20.
That seems about right to me. I’d hold, but I plan to wait for a better buying opportunity.
A bargain retailer?
One big-cap retailer that may already be priced at bargain levels is DIY chain operator Kingfisher (LSE: KGF). This group’s main businesses are B&Q, Screwfix and French chains Castorama and Brico Depot.
Kingfisher shares have fallen by 35% over the last 12 months, leaving it lagging far behind the FTSE 100. The firm has two main problems. The worst is that sales are falling. B&Q sales dropped 2.8% during the third quarter, while sales in France were 3.9% lower.
The only real bright spots were Screwfix, where sales rose by 10.6%, and the group’s Polish business, which is also performing well.
The other challenge facing chief executive Veronique Laury is the tough task of unifying the product ranges sold across its different store chains. This five-year programme is expected to add £500m to annual profits by the time it completes in 2021.
Why I’d buy
The main risk I can see is that DIY chains like B&Q and Castorama will continue to struggle, as more people opt for ‘do it for me’ rather than DIY.
On the other hand, I can see several reasons why Kingfisher could be a good buy at the moment.
If the ONE Kingfisher unification project is successful, profits could rise strongly over the next 3-5 years.
The business benefits from good cash generation and the shares look good value to me. Kingfisher stock currently trades on 9.5 times 2018/19 forecast earnings, with a tempting dividend yield of 4.9%.
On balance, I’d rate these shares as a contrarian buy.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. 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.