Yesterday’s final results from Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) went down like a lead balloon, and the supermarket’s stock closed down by about 12% last night.
Always on the lookout for a contrarian bargain, I spent some time yesterday poring through the firm’s results, but I wasn’t tempted to catch this falling knife. In my view, Morrisons shareholders should be seriously worried — here’s why:
1) Earnings upset
Morrisons’ stunned analysts by cutting its underlying earnings forecast for the year ahead to between £325m and £375m. That’s less than half this year’s underlying profit before tax of £785m.
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Assuming a middle case of £350m, Morrisons now trades on a forecast P/E of about 13.5 — only slightly lower than the FTSE 100 forecast P/E of 14.9. That’s not enough of a discount for me.
2) Dividend promises
Morrisons then sprung its second surprise on investors — a 10% increase in the total dividend, taking last year’s payout to 13.0p, which equates to a trailing yield of 6.4%.
That seemed reckless enough, given that Morrisons’ net gearing rose to 60% last year, but the firm then followed up with a promise to raise its dividend by at least 5% this year.
In the current market, yields of more than 6% tend to indicate a high level of risk, and I would be very surprised if Morrisons doesn’t cut its dividend this year.
3) Morrisons’ identity crisis
Perhaps worst of all is Morrisons’ identity crisis. On the one hand, Morrisons is belatedly entering the online and convenience store markets, and plans to (finally) introduce a loyalty card to address its shocking admissions that it has “limited knowledge” of its customers and that much of its promotional activity is “untargeted”.
On the other hand, CEO Dalton Phillips claims that Morrisons “overlaps with the discounters more than anyone else”. Certainly, my impression of its planned price cuts and in-store changes is that it’s trying to be a better, but still affordable alternative, to Aldi and Lidl.
Morrisons needs a clear vision, and I’m not sure it has one.
Buy, hold or sell?
In my view, Morrisons shares are fully valued at around 200p. Stock market folklore suggests that profit warnings come in three, and Morrisons has only issued two so far. What’s more, I’d be very surprised if it managed to keep its promise to increase the dividend this year.
My verdict? Buy Tesco instead.
