Embattled supermarket chain Morrisons’ (LSE: MRW) share price rally earlier this year is now well and truly a distant memory. The business received a fillip after revenues at rival Tesco (LSE: TSCO) started to tick higher again, giving hope to the entire mid-tier supermarket sector as they fight back against the budget chains.
But with this sales uptick having blown itself out pretty rapidly, and the likes of Aldi and Lidl continuing to print double-digit revenues growth, investor appetite for Morrisons and its established rivals have headed resoundingly south again. Indeed, the Bradford firm is now dealing at an 26% discount to its 2015 hit peak back in the spring.
And I believe that the firm still has plenty of further ground to concede as the steady flow of negative news shows no signs of slowing. Based on a current share price around 153.8p, and projected earnings of 9.98p per share for the 12 months concluding January 2016, the retailer is dealing on an unacceptably-high P/E rating of 15.4 times.
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I would consider a reading closer to the bargain-benchmark of 10 times to be a more appropriate reflection of the absence of genuine earnings drivers at Morrisons. A subsequent re-rating would leave the retailer dealing at 99.8p per share, a whopping 35% reduction from current prices.
Sainsbury’s poised to slide, too?
But Morrisons is not the only bruised grocer in danger of further share price woe. Mid-level peer Sainsbury’s (LSE: SBRY) has also seen its value shuttle lower in the face of deflationary woes and the breakneck progress of both budget and premium rivals — a current share price of 230p represents a 19% collapse from the year’s highs struck in April.
But based on projected earnings of 21.5p per share for the period ending March 2016, today’s price creates a P/E multiple of 10.7 times. Although a much fairer reading than that of Morrisons, a similar adjustment to 10 times forward earnings would create a stock price of 215p, down 7% from recent levels.
Competition turning up the heat
Such a downgrade is a very real possibility in my opinion as the fragmentation of the British grocery sector intensifies. Latest Kantar Worldpanel release showed sales at Morrisons drop a further 1% in the 12 weeks to September 13, although activity at Sainsbury’s enjoyed a rare pick-up and till rolls improved 0.9% in the period.
However, these figures pale in comparison with those of Lidl and Aldi — these outlets saw sales gallop 16% and 17.3% respectively in the three-month period. On top of this, Kantar added to worries at Sainsbury’s and Morrisons by highlighting the threat to their online operations, currently the only clear growth driver at either firm.
The research tank noted that “almost 7% of grocery sales are currently purchased through the internet, and existing online supermarkets will be watching closely to see when Amazon Fresh will launch in the UK and whether it will steal market share or grow the online market even further.”
Morrisons and Sainsbury’s are already having to embark on massive, margin-crushing discounting to stop shoppers bolting towards the exits, while the former’s decision to hive off its M Local outlets this month has cast concerns that the convenience growth sector may have peaked. I believe that the risks continue to outweigh the potential rewards at both retailers, a situation that is unlikely to improve any time soon.
