Without a doubt, one of the FTSE 100’s worst performers this year has been Wm. Morrison (LSE: MRW) (NASDAQOTH: MRWSF.US).
And with the company’s shares down slightly more than 26% so far this year, many shareholders are asking: “How much lower can Morrisons go?”
Overvalued with further to fall
Unfortunately, as Morrisons’ income slumps, it is possible that the company’s shares could fall a further 25%.
Indeed, with £1bn of price cuts eating into to Morrisons’ bottom line, the City expects that the company’s earnings per share will fall around 50% this year. With this being the case, the company’s shares currently trade at a forward P/E of 14.8, which seems expensive for a company with falling profits.
What’s more, a forward P/E of 14.8 means that Morrisons is trading at a significant premium to its larger peers, Tesco and Sainsbury’s — Tesco and Sainsbury’s currently trade at a forward P/E of 11.2 and 11.1 respectively.
Based on these figures, if Morrisons were to fall back to its average sector valuation of 11.1, the company’s shares would be trading at 146p per share — 25% below current levels.
Hang on a second
With Morrisons’ earnings crashing, it would be easy to quickly write off the company but there is hidden value in Morrisons’ balance sheet.
You see, Morrisons holds the freehold too many of its stores and warehouses. In total, the value of this property is worth around £8.6bn, or 360p per share. Further, Morrisons’ shareholder equity, the value of assets after discounting liabilities is approximately £5.2bn, 217p per share.
The shareholder equity value, or net asset value as it’s more commonly known, is the total value of the company’s assets that shareholders would theoretically receive if the company were liquidated. So, on this basis, Morrisons is undervalued.
What’s more, with the company currently valued at less than the value of its property, there is a chance that Morrisons could be brought out by a private equity buyer looking to make a quick buck, buying the company and selling off assets.
Foolish summary
Overall, it’s hard to place a valuation on Morrisons. On one hand, the company’s profits are sliding and based on this, the company is expensive at current levels. On the other hand, Morrisons looks to be undervalued based on the value of its assets.
With these factors in mind, I feel that Morrisons’ shares can’t fall much lower: the value of the company’s assets is just too hard to ignore.
