Purplebricks (LSE: PURP) has disrupted the traditional estate agency market with its online fixed-fee model. Meanwhile, Morrisons (LSE: MRW) has successfully adapted its business in the face of supermarket-sector disruptors Aldi and Lidl.
Here, I’ll discuss the factors that have persuaded me the recent strong rise in the Purplebricks share price is a good opportunity to sell, and why I’ve concluded the weakness of the Morrisons share price has created a good opportunity to buy.
Purplebricks’ shares hit a multi-year low of 90p in May, but began a sustained recovery from early July. This followed the release of the company’s annual results. Having previously announced the closure of its Australian business, it revealed it’s also ending its equally disastrous expansion in the US.
Clearly, investors have welcomed the news, and the company’s renewed focus on its established UK operations, and smaller Canadian business. Management reckons Purplebricks is now in a position to “deliver profitable growth for shareholders.”
The company trumpeted UK revenue growth of 21% to £90m for the year, and an operating profit of £5.3m. However, if you look behind the 12-month figures, you’ll find revenue slumped 13% in the second half, compared with the first half, and the business swung to an H2 operating loss.
I’m not convinced this is entirely down to the current economic and political uncertainty in the UK, because I’ve long questioned the sustainability of the company’s no-sale-still-pay business model. New chief executive Vic Darvey recently revealed he’s considering moving away from the model, which he admits may not be working in some areas of the UK.
The market is rating Purplebricks as a high-growth stock. At a current share price of 120p, it’s valued at £368m, or four times revenue. This is a higher rating than Boohoo, for example, which is growing both revenues and profits at a rate of knots. As such, I see Purplebricks as overvalued, and possibly grossly so.
A third consecutive year of strong sales and profit growth suggests Morrisons is adapting well to the disruptive influence of discounters Aldi and Lidl, and what it calls “an ever-changing British retail scene.”
The turnaround followed boardroom changes in 2015, and a number of smart strategic moves by the new management team. Chief executive David Potts isn’t resting on his laurels. He’s stated: “We remain confident that Morrisons still has many sales and profit growth opportunities ahead, and expect that growth to be meaningful and sustainable.”
I put Morrisons success down to good management and innovation in its core operations, and a canny drive into wholesale. Deals with the likes of Rontec, Sandpiper, MPC Garages, McColl’s Retail and Amazon have provided the company with a growth engine for the future.
Morrisons and Amazon, for example, announced earlier this year they’re expanding their ultra-fast, same-day, online grocery home delivery service to many more cities across the UK. Amazon’s UK boss commented: “We are committed to growing our grocery business … and our relationship with Morrisons is an important part of that long-term growth.”
At a share price of 188p, Morrisons trades on 14 times forecast earnings, with a prospective 3.7% dividend yield. I think this represents good value and that the company could even become a takeover target.
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G A Chester has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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.