Wm. Morrison Supermarkets plc Could Be Worth 305p

Wm. Morrison Supermarkets plc (LON: MRW) is struggling, but could be on the rebound.

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Things are tough for the supermarkets these days, with Tesco reporting its third successive quarter of falling sales. And while the big players are struggling, things haven’t been rosy for Wm. Morrison (LSE: MRW) (NASDAQOTH: MRWSY.US) shareholders either.

Morrisons has been very late to the online-shopping game, and that has helped depress its share price — it’s down nearly 30% over the past 12 months, to just 194p.

Not lowly-valued

MorrisonsAnd with a fall in underlying earnings per share (EPS) forecast for the year to January 2015, the shares are not on a low P/E valuation even after that slump — we’re looking at around the FTSE average of 14.

But the pundits are expecting things to start picking up again, albeit slowly, from the following year — so how much might Morrisons’ shares be worth in five years’ time?

Extrapolating the latest forecasts a little to January 2019, a reasonably conservative estimate might suggest EPS of around 17p. That would still be a good bit less than the 25p levels the company has been recording in the recent past, but it would be a useful recovery from from the 13p currently being predicted for 2015.

Assuming an average P/E of 14, we could see the share price rise to 238p. That’s only 23% higher than today’s price, and not a great return at all over five years.

Add in the cash

But there are dividend yields of around 6% to add to that, and the City is suggesting shareholders could pocket a total of around 67p. That would take the overall worth of a share today up to 305p, for a 57% gain.

That’s more respectable, but we still need a bucketload of caution here — because those dividends would only be weakly covered. For 2015, EPS is actually expected to fall short of the predicted payout, and over the next few years we’d be seeing cover of around 1.2 times to 1.3 times. That’s way below, for example, Tesco’s forecast dividend cover of better than 1.8 times.

Worth buying?

Will the Morrisona share price come to reflect a value of 305p by 2019? It way well do, but it’ll be dependent on at least two things — a general supermarket recovery, and the success of Morrisons’ internet shopping. But until the sector’s bigger competitors are seeing things ease, I can see Morrisons continuing to lag behind.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Alan does not own any shares in Wm. Morrison or Tesco. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.

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