Shares in Wm Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) have hammered the competition over the last month, gaining 14%, against a 3% fall for Tesco and a 1% drop for J Sainsbury.
The question for investors is whether more gains are in the pipeline when the firm’s results are published on Thursday, or whether the firm’s results will disappoint.
Good news on sales
There are some signs of hope: on Tuesday, the latest sales data from market research firm Kantar Worldpanel showed that Morrison’s sales fell by just 0.4% in the 12 weeks to 1 February, compared to the same period last year.
That puts Morrisons in second place among the big four, behind Tesco — where sales rose — but ahead of Asda and Sainsbury’s, where sales fell by 1.7% and 1%, respectively.
My view throughout the last year has been that Morrisons’ recovery plan does appear to be working, and this week’s Kantar figures tend to confirm that view.
What about profits?
The latest consensus forecasts show that Morrisons is expected to report adjusted earnings of 12.3p per share tomorrow, with earnings rising slightly to 12.6p per share in 2015/16.
On this basis, Morrisons’ shares don’t exactly look cheap: the current share price of about 205p puts the supermarket on a forecast P/E of more than 16. In my view, there’s a fair amount of optimism in the share price already.
Hopes for new boss
One reason for optimism is that Morrisons’ new chief executive, ex-Tesco UK boss David Potts, is due to start work on Monday. The City is hoping that Mr Potts will bring the kind of financial and operational efficiency to Morrisons that was historically associated with Tesco.
I reckon that until Mr Potts issues his first trading update, there will be a measure of uncertainty surrounding the outlook for Morrisons.
Dividend risk
I’m pretty much certain that one of Mr Potts’ first acts will be to cut Morrison’s dividend down to a more sensible level.
The latest consensus forecasts show that the City expects a 30% cut to 8.6p in 2015/16, which gives a decent prospective yield of 4.2%.
Beyond that, it’s hard to say: my instinct is that tomorrow’s results won’t move the share price very much: the market will be waiting to hear from the new boss before forming any conclusions.
However, Morrisons’ shares are up by 35% from last year’s low. The next stage of the firm’s recovery could take longer, and in my view there are better buys elsewhere in today’s market.
