Should I buy Morrisons shares?

The UK supermarket sector is getting very competitive. Royston Roche takes a deeper look into Morrisons shares to see if the company is a comeback stock.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Man shopping in supermarket

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Morrisons (LSE: MRW) shares have not given a good return to investors in the last few years. Shares are down about 30% since its market peak in August 2018. The drop in market capitalisation of the company is one of the reason for the demotion of the stock from the FTSE 100 index to FTSE 250 index.

I would like to understand the various pros and cons of investing in this company.

Morrisons Company’s fundamentals

The company’s revenue for the fiscal year 2021 grew by 0.4% year-over-year to £17.6bn. At the outset it looks like muted growth. However, when we exclude fuel sales, total revenue grew by 8.9%. Fuel sales were down due to the lockdown and are expected to pick up this year.

For retail businesses a more common metric is like-for-like sales. It excludes new store openings or closures in the current or previous financial year. At Morrisons, like-for-like sales excluding fuel and VAT grew by 8.6%. Tesco will release its full-year results next month. If we compare the third quarter results, Morrisons grew faster at 7.8%, compared to Tesco’s 5.7% growth.

In the past, the company has been slow in its shift to online sales. However, due to recent partnerships with Ocado, Amazon, and Deliveroo, online sales are now picking up fast. The company’s online sales tripled in the fiscal year 2021. The unit is profitable which is very good.

Its ‘Morrisons on Amazon’ service is now available in 50 towns and cities. The service lets Amazon members shop for Morrisons goods on its platform. It already accounts for more than 10% of sales in the majority of its stores where the company offers the service.

In my opinion online sales could help the company to grow its revenues in the next couple of years. Morrisons is also supplying its groceries in the Amazon Fresh platforms. This gives the company the opportunity to grow its revenues in multiple channels. It has also extended the McColl’s partnership for a further three years and will convert 300 of its stores to the Morrisons Daily format. These stores offer a full range of Morrisons convenience range while being owned and operated by McColl’s.

Morrisons shares are currently trading at a price-to-earnings (P/E) ratio of 45. The high ratio is due to lower profits caused by additional Covid-19 costs. The forward P/E is 12.5, which suggests that analysts are expecting a strong rebound in the company’s profits next year. Of course, forecasts can change.

Risks to consider

The supermarket industry is getting very competitive. Since many consumers prefer online shopping they can easily compare prices and this could put pressure on the profit margins of the company. Morrisons has to face competition from Tesco, Sainsbury’s, Asda, Lidl, Aldi, and Marks & Spencer

The company has benefitted from the lockdown when most of the other stores were closed. Online sales also got a boost due to more people making online purchases during the lockdown. With the reopening of most retail stores next month, that growth rate might slow.

Final view on Morrisons shares

The company’s revenue growth is finally showing some improvement. Management’s restructuring efforts are paying off. However, due to the price competition, I will keep the stock in my watchlist and further assess the value competitiveness relative to other major retailers.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Roche has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Morrisons and Tesco and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »