Is It Time To Buy John Wood Group PLC, WM Morrison Supermarkets plc & Shire plc?

Big news is expected as soon as this week for the shareholders of John Wood Group (LSE: WG), Morrisons (LSE: MRW) and Shire (LSE: SHP) — is it time to buy their shares? 

Job Cuts

A FTSE 250 oil and gas services firm, John Wood is reportedly expected to announce to have cut some 10% of its global workforce so far this year, or about 4,000 employees, when its interim results are due tomorrow. 

More job cuts could ensue in this environment, in my view, which means that even assuming normalised revenues in the region of $6.5bn a year into 2017, its 5.7%/5.6% forward operating margin could rise at a faster pace, yielding a stronger earnings per share profile for the enterprise.

This could render John Wood’s relative valuation cheaper than it currently is at 14x forward earnings, based on its price-to-earnings (P/E) ratio. With a price-to-book ratio just above 1x, and a forward yield in the region of 3.4%, its shares do not seem to be expensive, to be honest — particularly because its balance sheet is strong.

If its operating cost base is properly managed, investment risk could be limited indeed. 

Convenience Stores

There is fresh speculation that the food retail sector is about to face a new wave of price cuts, and that Morrisons could sell its convenience stores — neither of which is great news for Morrisons. 

“Morrisons is in advanced talks to offload its convenience stores to the investment firm that orchestrated a dramatic rescue of Monarch Airlines,” The Telegraph reported on Saturday, adding that the buyer, Greybull Capital, could save the stores, most of which do not make their cost of capital. 

What this means for shareholders is unclear.

Convenience stores are one way to preserve market share, and although they may be a loss leader at group level, it’s hard to see how Morrisons could be better off without them. Moreover, proceeds from a sale will unlikely be meaningful, and even assuming that the stores are valued at 0.5x sales, Morrisons should fetch only between £100m and £200m.  

That said, If Morrisons continues to shrink, it could be taken over. Based on several metrics, its stock is not a steal at 180p but is not expensive, either — yet there are more solid alternatives in this market. 

Such as Shire, for instance. 

M&A Talk 

Baxalta stock rose 3% on Friday, and market talk is that Shire is about to announce a blown-out offer in the region of $50 per share for its US biotech rival in order to secure the backing of Baxalta’s board.

So many things could go wrong with the deal that recent weakness in Shire’s valuation could represent a great opportunity to snap up its shares.  As I expected, Shire’s stock price has been under pressure ever since the group announced it would go hostile in early August — but just how likely is Shire to offer a 60% premium against Baxalta’s unaffected share price? Very, the bears argue.

Such an outcome remains a distinct possibility, but if the deal is swiftly done at between $45 and $50 a share, Shire stock could be a good opportunity right now. Most likely, however, negotiations will drag until the end of the year, which heightens the risk associated to its shares. 

On the face of it, Shire’s management has shown a good degree of discipline in M&A during the years, and I doubt they’ll offer any amount to wrap up the acquisition of Baxalta, although the strategic logic behind the tie-up is compelling.