Is The Reward Worth The Risk With WM Morrison Supermarkets plc, Kingfisher plc & Marks and Spencer Group plc?

The shares of Morrisons (LSE: MRW), Kingfisher (LSE: KGF) and Marks and Spencer (LSE: MKS) have been on their way up for a few months now — but will their rally continue in the next few quarters, or have they become too expensive for value hunters? 

Here are a few things you should know about these three retailers, and why you may want to be careful before adding them to your portfolio. 

Marks & Spencer: Is It Fully Priced?

M&S provided an upbeat quarterly update last week, when its shares rose 4.5% in a single trading session. The shares are up 18% this year, and have rallied 45% since their one-year trough in October.

Have you missed the boast or is M&S still an appealing story?  

Well, the shares trade on earnings multiples of 17x and 15.5x for 2015 and 2016, respectively, with a forward yield above 3% and forward leverage just below 2x.

Financially, M&S doesn’t show signs of stress, but it needs to show that it’s back on a sustainable growth pattern to deserve my attention at this price.

It trades above the average price target from brokers, and only if bullish top-end estimates from analysts are met, upside could be 15% or so. The shares look fully priced right now, although there is a possibility that the retailer could continue to surprise investors and analysts. 

Kingfisher: A Safer Bet Than M&S

Kingfisher also trades above the average price target from brokers and, similarly to M&S, if top-end estimates from analysts are met then the shares could feasibly rise 15% from their current level.

Its forward trading multiples, based on earnings and cash flows, are in line with those of M&S, but the shares are up only 9.6% this year — its performance reads +26% since mid-October, however.

Its balance sheet is strong and the stock offers a forward yield of 3%, which in my view is more sustainable than that of M&S. 

I think Kingfisher could outperform M&S, and I’d add some exposure on weakness.

But is Morrisons the best bet of all?

Morrisons: Still Lots To Do 

I tend not to value big supermarket chains based on their trading multiples, although one could easily argue that Morrisons, at 13x forward earnings and with a forward yield at around 2.9%, is the most obvious investment of the three.

It’s not so simple, however, and other figures also deserve attention right now. 

In the 12 weeks to 29 March, such rivals such as Tesco and Sainsbury’s rose sales by 0.3% and 0.2%, respectively, according to data released on Wednesday by Kantar Worldpanel, but sales are still declining at Morrisons (-0.7%), whose stock has appreciated 24% in the last six months.

By contrast, as you may know, German retailers Aldi and Lidl are growing their market shares in the UK market. This is a real threat for big four. 

That said, Morrisons remains a decent restructuring story, but it lags some distance behind Tesco — and it may take longer for its new management team to make an impact and boost value. Moreover, in spite of a recent dividend cut, the dividend cover is still close to the danger zone. 

So, at 200p a share, Morrisons seems priced only between 5% to 10% below fair value right now.