2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8% this year, and is 52% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) still offer good value, after five years of market gains.
Back to basics
Morrisons’ share price has been relatively volatile this year, but looks likely to end the year more or less unchanged. Its performance over the last five years is also uninspiring — it’s 5% lower than it was in December 2008.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
Although Morrisons’ share price hasn’t changed much for years, its underlying business has developed, and I believe Morrisons’ shares could offer decent value for new buyers today:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 9.9 |
| Trailing dividend yield | 4.6% |
| Operating margin | 4.7% |
| Net gearing | 51.3% |
| Price to book ratio P/B | 1.2 |
Morrisons’ current P/E of 9.9 and P/B of 1.2 are undemanding, and the firm’s shares offer an attractive yield for investors.
However, it’s worth pointing out the negatives — Morrisons’ earnings have dropped slightly this year, and heavy investment in its convenience store rollout and online deal with Ocado mean that gearing is rising; Morrisons’ net debt has tripled during the last three years.
Make or break in 2014?
Investors will probably expect to see some signs that Morrisons’ growth plans are working in 2014, although in reality, it will probably be 2015 before a fair assessment can really be made.
City analysts are fairly cautious on Morrisons’ prospects, and are currently forecasting only modest growth in earnings and dividend payout during Morrisons’ 2014/15 financial year:
| 2014 Forecasts | Value |
|---|---|
| Price to earnings (P/E) | 10.0 |
| Dividend yield | 5.1% |
| Earnings growth | 3.8% |
| P/E to earnings growth (PEG) | 4.3 |
Morrison’s high PEG ratio and low forecast earnings growth highlight the problems facing the big UK supermarkets at the moment — they are competing for bigger slices of a shrinking pie.
Average UK household incomes are continuing to lag inflation, and with M&S Food, Waitrose, Aldi and Lidl all nibbling at the edges of the big supermarkets’ market shares, it’s a tough business to be in at present.