Today I am looking at two numbers that illustrate why I believe Morrisons (LSE: MRW) is a perilous pick for stock hunters.
The march of the budget chains has spliced up the UK grocery sector like never before, a phenomenon which analysts believe still has plenty left in the tank.
Most recently, according to aBloomberg report, ratings agency Moodys predicted that the combined market share of new kids on the block Lidl and Aldi will hit 10% during the next two years. And this is likely to reach between 12% and 15% further out, matching their combined share in European marketplaces.
With the 2008/2009 financial crisis having hobbled British shoppers spending power and driven them into the arms of the discounters, people now demand much more bang for their buck, particularly as real wage growth continues to lag inflation.
Such conditions continue to drive sales at these cheaper outlets through the roof. Indeed, latest Kantar Worldpanel data showed the till roll at Aldi jump 29.1% in the 12 weeks to September 14, pushing the firms market share to 4.8%, up from 3.7% in the corresponding 2013 period.
And across at Lidl, turnover surgedan impressive 17.7% during the 12 weeks, in turn pushing its take of the UK grocery market to 3.5% from 3% last year.
Given this excellent momentum it seems inevitable that the combined force of the budget chains will drag them into range of the so-called Big Four sooner rather than later. Indeed, fourth-placed Morrisons saw its own market share dive to 10.9% as of mid-September, while next-placed Sainsburys slice fell to 16.2% and number two Asdas share stagnated at 17.4%.
And with the discounters undergoing aggressive expansion Lidl plans to create 5,000 jobs over the next five years as part of a 220m capex drive, while Aldi has set aside 600m for investment through to 2016 Morrisons and its mid-tier rivals certainly have their work cut out for them to just stand still.
Against these tough trading conditions, Morrisons is expected to clock up a 51% earnings decline during the 12 months concluding January 2015, to 12.3p per share. If it happens, it would bea second consecutive dip into the red for the Bradford-based firm.
And with a lack of a clear turnaround strategy likely to lead to further earnings woes, I do not believe share prices currently reflect this. Indeed, Morrisons changes hands on a P/E rating of 12.9 for fiscal 2015, well above the value benchmark of 10 or below, territory which I believe would be fairer value given the risks facing the firm.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.