Earlier this year, I decided not to sell my shares in Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) before the firm’s final results were published on March 14. As a result, I’m now sitting on a sharp loss.
Morrisons shares have fallen heavily since March, and consensus earnings forecasts for 2014/15 have now plummeted to just 13.7 pence per share — even lower than the 15p or so suggested by Morrisons’ own forecast.
As a result, Morrisons shares now trade on a forecast P/E ratio of 14.3, and are starting to look expensive, while the firm’s lofty 6.6% prospective yield suggests to me that a dividend cut is likely this year.
The concerns I raised in my post-results article now seem doubly valid, so what should I do?
You too?
I suspect I’m not the only investor who regrets holding onto their Morrisons shares. If you are in the same position, then like me, you may be wondering whether you should sell now, in case things get even worse.
After all, I wouldn’t buy Morrisons shares at today’s price, so by rights, I should follow one of my own rules and sell them, limiting my losses. Yet there are points in Morrisons’ favour.
Asset-backed shops
Thanks to Morrisons’ £9bn property portfolio, the firm’s shares now trade slightly below their 200p book value, and only marginally above their tangible book value of 181p. This should limit any further downside.
Morrisons’ core property portfolio is 90% freehold, which will allow the firm to release some cash through sale and leaseback transactions, while retaining a higher-than-average level of freehold ownership. Morrisons plans to generate around £400-£500m in this way during the current year, and plans to raise £1bn by 2016/17.
This approach might sound a bit desperate, but in Morrisons’ case I think it’s a reasonable way to limit new borrowing and improve cash flow, during a difficult period.
Stay a little longer
The UK economy may also help Morrisons. Recent data suggest that wage growth is finally picking up, and the housing market is thriving in many parts of the UK — two factors that traditionally boost consumer confidence and spending.
Morrisons’ distinctive fresh food and meat proposition remains attractive, and I’m going to hold on a little longer before deciding whether to ditch my shares — at least until 8 May, when Morrisons will publish its first quarter interim update, which will include trading details from the key Easter period.