Morrisons is Britain’s fourth-largest supermarket chain, with a 12.6% share of the market. It’s a classic ‘widows and orphans’ stock. Its beta is about half that of the FTSE. In other words, it offers secure, if not spectacular, rewards in return for taking lower-than-average risk. Indeed, despite 2009’s sales figures being tough to beat, and the disruption caused by December’s mini-Ice Age, the group reported solid Christmas trading, with like-for-like sales up 1%. The results once again show that, regardless of the conditions, Morrisons ticks along rather nicely.
The company has positioned itself cleverly against its rivals. When times are hard, shoppers at the higher end – the likes of Waitrose and Marks & Spencer – tend to trade-down to Morrisons’ quality yet affordable fare. Conversely, when cash-strapped families splash out, they tend to treat themselves by switching up to Morrisons from the hard-line discounters, such as Aldi. Sainsbury’s occupies a similar position, but has more non-food exposure, which may hamper it, as general retailing is likely to weaken after the VAT rise.
Also, Morrisons is not just a retailer. It owns ‘upstream’ assets in food production and sustainable farming. It also employs more specialist butchers, fishmongers and bakers in-store than its competitors. This means it can benefit from the long-term shift in consumer preferences towards home cooking, healthy eating and consumption of local produce. With inflation on the rise too, another attraction of Morrisons is that it should be able to pass on most of these costs.
WM Morrisons (LSE: MRW), rated a BUY by ING Barings
But solid execution is only part of the story. There are other tasty opportunities. The recently launched Collector Card scheme, for example, appears to be a roaring success. And in the future, the firm is almost certain to beef up its presence in online shopping and convenient stores.
The City is forecasting 2010 turnover and underlying earnings per share (EPS) of £16.5bn and 22.7p. In 2011, this is expected to rise to £17.5bn and 25.1p. As a result, the stock trades on p/es of 11.9 and 10.8 and pays a 3% dividend yield that is more than twice covered. I would value the group on a multiple of ten times earnings before interest, tax and amortisation (EBITA). If you deduct the net debt of £849m, this gives an intrinsic value of around £3 a share. Interestingly, Morrisons also owns about 85% of its properties (worth £6.1bn), which could make it a target for private equity.
As always, there are risks. The main ones include the threat of another recession; the chain’s greater exposure to the less affluent north of Britain; the cut-throat competition in the supermarket sector; and the risk that it could make a bid for Ocado. All the same, for cautious investors, Morrisons’ business offers a solid return with relatively low risk. ING Baring has a target price of 350p.
Disclosure: I own shares in MRW.
Recommendation: BUY at 270p