Morrisons
More reasons to invest at Morrisons
As can be seen from the chart below the FTSE 100 the index has broken down into fresh short term lows this week.
Mixed data has caused investors to question the hopes of a sustained recovery in the global economy. The UK, US and emerging markets have extended their losing streak and are back at levels last seen over two months ago. Commodities have also been weaker, with oil prices hitting a five week low.
The US is moving into second quarter reporting season and this is likely to drive markets over coming weeks. Analysts are forecasting that S&P 500 earnings will decline 36% during this quarter compared to the same period last year.
The fear is that the more optimistic US investors have already seen reason to buy back into stocks and the reporting season could illustrate that they have been too hasty. In light of the recent uncertainty of a second half recovery, investors are likely to focus on the corporate outlook and guidance for the rest of the year.
Technical analysis of the above chart shows that the FTSE 100 has fallen around 7.5% in the past month. The index failed to hold onto secondary support at 4200 and has continued to post fresh lows this week, which suggests that the short term trend could be lower. However, the relative strength index (RSI) is showing some divergence as it remains above its recent lows even though the wider market has moved lower. This suggests there is little momentum behind the recent selling and could be explained by the pitiful volumes traded this week.
The moving averages are now turning lower and major support is seen at the key historical and psychological 4000 level. However, a break back up above the 50 day exponential moving average (EMA) at 4300 would suggest the medium term up trend remains in place.
In summary, the recent weakness has turned the technical outlook more bearish in the short term. Although, it is worth noting that the average daily volume traded on the FTSE this week has been among the lowest this calendar year, which may not paint a true picture. The next few weeks are likely to be dictated by the earnings coming out of the US and how the outlook for these companies is perceived, so it is worth keeping a close eye on these.
In light of the above analysis, I have been focusing on defensive stocks with good growth potential, as I believe there could be some longer term buying opportunities while the market is at these levels.
Morrisons (Epic: MRW) is the fourth largest supermarket chain in the UK and the only major retailer to manage every aspect of its commercial operation in house, including bakeries, meat processing, fresh food production and transport.
The groups large range of “value” lines have grown by 50% in the past year and puts them in a good position to prosper from the current economic climate, as they have been able to attract customers away from pricier competitors.
Historically Morrisons has disappointed the city, with a string of five profits warnings weighing on the shares after their problematic integration of Safeway in 2004.
However, since Marc Bolland took over from Sir Ken Morrison as CEO in 2006 the transformation has been vast. The group updated the market with a strong first quarter interim management statement on the 4th June, which came in ahead of expectations.
Like for like sales grew by 8.2% in the 13 weeks to the 3rd May, which was substantially better than the 4.3% for Tesco and 4.5% for Sainsbury.
The recent growth in sales has boosted market share, with management reporting that the group’s share of the UK grocery market had grown from 12.1% to 12.3%, while rival Tesco has fallen. Furthermore, it highlighted the rapid growth in customer numbers, with one million extra shoppers in the stores on a weekly basis, which was well ahead of forecasts.
Morrisons also has one of the strongest balance sheets in the sector, which means that financing costs remain low and this creates more appeal to potential acquirers. At year end net debt stood at only 14% of net assets, which is well below the sizeable 74% gearing at Tesco and 39% at Sainsbury’s.
It also boasts one of the best asset backings in the sector, with ownership of 92% of its freehold property, which keeps rental costs down and boosts the valuation of the business.
Going forwards the emphasis is still on growth. The group had originally planned to return £1 billion of capital to shareholders, but management has decided the cash would be better spent on acquiring 38 stores off the Co-operative group and opening 10 other new stores this year.
Many investors are deterred by the comparatively low dividend yield on offer of 3.3% per annum, compared to yields of 3.6% at Tesco and 4.6% at Sainsbury’s. Although, the group actually has a dividend cover of over 2.5 times earnings, which suggests that they have scope to increase it, but have chosen not to at this stage in order to use these funds to expand the company.
The shares are currently trading on a forward earnings of 13.5x, which is marginally more expensive than the 12.3x at Tesco and in line with Sainsbury. However, Morrisons offers superior earnings growth of 18% from 2010 - 2011, one of the strongest balance sheets in the sector, the highest proportion of freehold property in the industry and leading sales momentum, which I believe more than justifies this premium.
As can be seen from the above chart of Morrisons the shares rallied off a low of 210p in October of last year to 287.3p in January, before drifting back to current levels.
Technical analysis of the above chart highlights the support at 235p that has provided a base for the shares on several occasions this year. The recent upward move lifted them off this level and momentarily pushed them through the 50 day EMA, which is a bullish signal and could provide a catalyst for the shares if they can close above this level.
Furthermore, the oscillators are turning more positive, with the RSI moving back through the 50 level, which indicates that the momentum is building. The moving average convergence divergence (MACD) histogram has also turned positive and the moving averages are crossing over, which is a signal for further upside movement.
The stock has underperformed the sector by around 12% in the last three months and in light of the above fundamental and technical analysis I believe this weakness could be overdone.
At the time of writing the share price is 242.5p and my short and long term opinion is positive. Near term targets are seen at 253.25p, 259p and 270p, with a tight stop loss marginally below the key support at 232.25p, which makes it an attractive low risk / reward trade.
The writer does not hold a position in Morrison. The material in this report has come from Simply Charts and the Morrisons corporate website.
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Other Morrisons news
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21/01/10 Wm Morrison says traded well through Christmas period
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19/11/09 Morrison’s like for like third quarter sales climb 4.3%
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10/09/09 Morrisons profits soar in first half, but company sees slower growth in second half
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21/07/09 Morrison’s leads FTSE 100 higher with positive trading update
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12/03/09 Morrisons' preliminary results lift shares, bucking trend of FTSE 100
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22/01/09 Morrisons reports good Christmas trading, full-year profit forecast unchanged