Is Now The Time To Buy Morrisons?

Published in Company Comment on 6 November 2012

Should you buy William Morrison Supermarkets (LSE: MRW) today?

I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at William Morrison Supermarkets (LSE: MRW) to determine whether you should consider buying the shares at 265p.

I am assessing each company on several ratios:

Price/Earnings (P/E): Does the share look good value when compared against its competitors?

Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

StockPrice3-yr EPS growthProjected P/EPEGYield3-yr dividend growthDividend cover
Wm Morrison Supermarkets26525%9.714.2%31 %2.2

The consensus analyst estimate for next year's earnings per share is 27.2p (9% growth) and a dividend per share of 11.7p (10% growth).

Trading on a projected P/E of 9.7, Morrisons appears to be valued between its major London-listed competitors, Tesco (LSE: TSCO) and J Sainsbury (LSE: SBRY), which trade on P/Es of 9.3 and 11.3 respectively. Morrisons' P/E and high single-digit growth rate give a PEG ratio of about 1, which implies the share price is appropriate for the earnings growth the firm is expected to produce.

Supporting a 4.2% yield, the dividend is slightly below Morrisons' competitors, who currently have an average yield of 4.5%. However, Morrisons has a three-year compounded dividend growth rate of 31%, implying the payout could soon catch up, and even overtake, that of its peers.

Indeed, the dividend is twice covered, giving room for further payout growth. Morrisons is also on track to return £1 billion to shareholders through share buybacks over the two years ending in March 2013.

Morrisons looks to be reasonably valued. What about future growth?

Recently, Morrisons' share price has come under pressure. Many analysts are concerned that the firm's growth strategy is not working, and capital expenditure is putting pressure on the balance sheet.

In my view, though, Morrisons is on the move. The firm has recently reduced its capital expenditure and still has one of the lowest levels of debt within the sector.

This year, Morrisons is opening new distribution and manufacturing centres to improve profit margins and accommodate growth within its value range, which has seen sales gain 40% this year. Morrisons is also driving forward with a new convenience store format in London, as well as expansion into the online wine market. The company plans to break into the clothing market next year as well.

These expansion programmes and the group's historic growth record lead me to believe that Morrisons is currently undervalued and has some exciting growth opportunities ahead. I also feel Morrisons has the ability to take significant market share from its competitors.

So overall, I believe now looks to be a good time to buy Morrisons at 265p.

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> Rupert owns shares in William Morrison Supermarkets.

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atalbot9 06 Nov 2012 , 1:43pm

It all sounds very "me too". Seems they are a behind the curve in a challenging, competitive market without anything particularly differentiated to offer.

Online wine....oh please. Clothing....TSCO and SBRY have been in it for 5+ years. Convenience stores....again I hope T & S have taken the most attractive locations.

I agree it looks attractive looking at financials but I don't see an attractive, differentiated value proposition. Would rather stick to T & S.

SevenPillars 06 Nov 2012 , 3:18pm

If ever there was a case to be said for not following what the city thinks WM Morrison is a good example. Until about 6-9 months ago, the city didn't think it was a problem that Morrison didn't do any of the following.

- Has no online presence.

- Lacks convenience stores.

- Didn't sell clothing.

Morrison have been late to the party on all of these, the much maligned Tesco is way ahead of them.

Suddenly, these are a problem that need to be addressed because Morrison is no longer producing the numbers that were deemed ok by the city as the share price steadily went up. The company was best performer in the sector until a year ago. Sainsbury seems to be one that can do no wrong for the city right now.

For those interested in buying, you ought to wait until they show their numbers later this week. The market is expecting them to be down, there has even been talk of profit warnings. If so, it could go a lot lower if the Tesco experience is anything to go by.

eccyman 08 Nov 2012 , 3:06pm

Much has been made of MRW being late to the local convenience store party. True in a sense, but SBRY & TSCO will have paid top price for their locations as they bought during the boom, MRW can pick up property in todays depressed market

RetailerExpert 13 Nov 2012 , 9:27am

Sell MRW whilst you still can! The price is going to drop like a stone.

They are in disarray, with many high profile departures lately, and some very significant but much lower profile departures happening all the time.

Major concerns exist over their strategy, and I don't believe that anything can be put in their plans to roll out online etc. as they aren't innovating in those areas. By rolling out stale concepts they have no hope of recovering lost ground on Tesco et al. As above, the same goes to new space, where it obvious that the best plots are taken, and Morrisons recently got rid of their new space experts, so they will end up paying over the odds for poor quality sites.

The 'Fresh' concept store are a failure and need to be recognised as such before all the cash is sucked into them. That same cash

For me they become a buy when they have clear direction, a new CFO and a competent and together leadership team.

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