It’s been a tough couple of years for investors in Morrisons (LSE: MRW), with the UK supermarket sector going through its most challenging period in living memory. Shoppers have become far more price-conscious and have sought out a ‘no-frills’ supermarket experience from the likes of Aldi and Lidl, in combination with the higher price point offerings of M&S and Waitrose. Those left in the middle, such as Morrisons, have been squeezed hard.
Indeed, earnings at Morrisons are due to fall by 53% this year and shares have fallen by a third since the turn of the year. However, now could be a good time to buy and share price gains of 18% could be possible over the medium term. Here’s why.
Growth Potential
It may seem rather strange to talk about Morrisons and ‘growth potential’ in the same sentence, but the company does have encouraging prospects. That’s because it is moving into online grocery shopping and convenience stores, which have proven to be the only growth areas for sector peers in recent years. Although it inevitably will take time for Morrisons to catch up to its rivals, the additional growth that could be provided from its new ventures could provide a boost to the company’s top and bottom lines moving forward.
Indeed, Morrisons –after this year’s expected 53% fall in earnings — is forecast to increase net profit by 18% next year. This shows that, while the present time is hugely challenging, it may not last forever. One catalyst to cause a shift in attitudes of supermarket shoppers is an improving macroeconomic outlook, with low inflation and wage increases combining to give UK consumers higher disposable incomes. This may cause price consciousness to ebb away and be replaced, to an extent, by a desire for better service and quality. This could stimulate Morrisons’ top and bottom lines.
Looking Ahead
With earnings forecast to increase by 18% next year and assuming that Morrisons maintains its current price to earnings (P/E) ratio of 14.7, shares could move 18% higher over the medium term. This would equate to a share price of 204p. With shares in the company currently yielding 6.3% (and dividends being covered 1.3 times by earnings), this could mean a total return of north of 20% over the medium term.
Certainly, there will be many more lumps and bumps ahead for investors in Morrisons, but for those who can afford to take risk, the rewards could be significant.