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.

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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.

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