2014 has been a very tough year for investors in Morrisons (LSE: MRW) and Debenhams (LSE: DEB). Indeed, shares in two of the most familiar names in UK retailing have fallen by 38% and 15% respectively since the turn of the year.
The main reason for their falls is a lack of profitability brought on by a weak consumer environment. Both companies have struggled to compete with lower cost competitors and, as disposable incomes have declined in real terms, shoppers have become less loyal in terms of where they shop.
However, the future could be bright for investors in the two companies because they could be takeover targets. Heres why.
Valuations
A key reason why Morrisons and Debenhams could be takeover targets is their valuations. For example, Morrisons trades on a price to book ratio of just 0.8, which means that investors can purchase 1 of net assets for just 0.80, which is very low. Furthermore, the companys balance sheet contains a large amount of property (around 80% of total assets are property, plant and equipment) and so investors can be sure that they are buying high-quality, tangible assets for which a relatively accurate valuation can be made.
Meanwhile, Debenhams also offers superb value for money at present. It has a price to book ratio of 1, which, although higher than that of Morrisons, is still very attractive. In addition, Debenhams trades on a price to earnings (P/E) ratio of only 8.6, which is well below the FTSE 100s P/E ratio of 13.1 and shows that the company is dirt cheap when assessing its income statement as well as its balance sheet.
Future Potential
Both companies could also be the subject of M&A activity because of an economic tailwind that may be set to come their way. In the last six years, inflation has outpaced wage growth and, as mentioned, shoppers have favoured price above service and quality and, as a result, Morrisons and Debenhams have lost out.
Moving forward, wage growth is likely to be higher than inflation, which means that shoppers may become less focused on price and instead return to seeking out higher quality and better service. These are both areas in which Debenhams and Morrisons excel on a relative basis.
So, while the present time may be a hugely challenging one for investors in the two stocks, the future could be much brighter as a result of the bid potential that is clearly on offer.
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Peter Stephens owns shares of Debenhams and Morrisons. 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.
