Wm Morrison (LSE: MRW) saw its share price crash by 44% over 12 months to 153p last week, before picking up a bit to today’s 172p. Will it still go lower?
Well, the supermarket chain posted a statutory pre-tax loss last year, and there’s a crash of more than 50% in earnings per share (EPS) forecast for the current year, ending January 2015, so that’s not looking good.
Still too high?
The EPS forecast would put the shares on a P/E of about 13.5, and that’s only a tiny bit below the FTSE 100 long-term average of approximately 14. To me that looks high for a struggling company in a struggling sector, even if there is a forecast dividend yield of 7.4% on the cards — it won’t be covered by earnings.
Forecasts for 2016 do pick up a little, suggesting an 11% recovery in earnings, but that would still leave us looking at a P/E of over 12. The 2016 dividend is expected to be cut, but only to a yield of 6.2%, which would be covered only 1.3 times by earnings.
It’s true that Morrisons has been rectifying the worst of its recent incompetence — it eventually got its online offering off the ground, and has tardily moved into the multi-format convenience store market, but is that sufficient for such a quick return to growth?
Like-for-like down 6.3%
In its Q3 update last week, Morrisons admitted that total sales in the quarter were down 3.6%, with like-for-like down 6.3% (excluding fuel). Online sales apparently contributed 0.7% to like-for-like sales, which is a pretty modest beginning.
Morrisons has been touting its new price-match thing that even includes matching with Lidl and Aldi, and that sounds impressive on the surface. But it seems to be horribly complicated, and in practice I can’t see it being a big attraction to shoppers.
So, things are going slowly, but the company did say “it will take time for our initiatives to fully benefit our sales performance“, and having seen how long it’s been taking for Tesco to make good on its transformation process, I have to say I’m not entirely convinced by that predicted return to growth next year.
But the City’s analysts have been getting a little more bullish, having edged up their consensus for 2015 EPS in the past three months from 12p to today’s 12.4p — although that’s still a long way below the 26p they were forecasting a year ago.
No optimism yet
But their guess for 2016 has been dropping — from 15.8p per share six months ago, down to 14.1p three months ago and then as low as 13.7p today.
Morrisons will surely turn things around, but at today’s share valuation I’m a long way from being tempted.