Today I am outlining why Wm. Morrison Supermarkets (LSE: MRW) could be considered a terrific stock for growth hunters.
Discounting fails to provide the answer
Investors in supermarket giant Morrisons would have been buoyed by the possible sight of those famous green shoots of recovery last month. Industry researchers Kantar Worldpanel advised that sales at the chain declined 1.9% in the 12 weeks to August 17, the best performance since the start of the year and a vast improvement on the 3.8% decline seen in the prior three-month period.
Although these renewed signs of life at the checkout was thanks largely to substantial discounting, Morrisons is still failing to get to grips with the galloping popularity of the budgeteers, and the company saw its market share collapse 30 basis points to 11% as sales at Aldi and Lidl kept on surging.
Instead, the effect of extensive price slashing is weighing heavily on the bottom line, and Morrisons saw underlying pre-tax profit collapse by more than half to 181m during March-May. This is clearly not a road Morrisons can remain on for much longer.
In the firms defence, company management is pulling out all the stops to revive its ailing business, from rolling out its internet presence albeit belatedly at the turn of the year in conjunction with online specialists Ocado, through to extending opening hours across hundreds of its stores last month.
But one has the feeling Morrisons will have to launch something cataclysmic to mitigate the pull of British shoppers love for a bargain and get profits rolling higher again.
Poor value versus the competition, too
Against an increasingly-difficult trading environment, City analysts expect the business to follow last years 8% earnings dip with a colossal 51% decline this year, to 12.3p. But the supermarket is expected to get on the road to recovery from fiscal 2016, and a 9% improvement to 13.3p is currently chalked in.
But in my opinion Morrisons current share price fails to fully reflect the scale of the difficulties the firm will have to overcome to get earnings growth back on a strong footing. Indeed, the company currently deals on P/E multiples of 14.5 and 13.4 times predicted earnings for 2015 and 2016 respectively, soaring above the bargain benchmark of 10 which I think would more fairly reflect the risks facing the supermarket.
And Morrisons is also a more poorly-priced stock than rivals Tesco and J Sainsbury which change hands on forward earnings multiples of 10.1 and 9.7 and which in my opinion boast more attractive propositions in the growth drivers of online shopping and convenience stores.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares in Tesco.We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.