Morrisons share price: can it go further?

The Morrisons share price has soared more than 50% compared to its 2020 average. One Fool considers whether it’s worth adding some shares to his portfolio.

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.

Supermarket aisle with empty green trolley

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.

The Morrisons (LSE: MRW) share price is on the move, riding the highs of a bidding war between US private equity firms. Its share price has stayed under 200p since late 2019. Then talks of a buyout in mid-June kickstarted a huge leap. As I write, the share price is at 290p, representing a 50% increase over its 2020 average. 

Index manager FTSE Russell has just added Morrisons to its “indicative FTSE 100 additions” list. This makes it likely to join the FTSE 100 next week. Could this cause the Morrisons share price to rise even further?

The takeover battle

With nearly 500 shops and 110,000 staff, Morrisons holds a 10.4% share of the UK grocery market. Thanks to an ongoing bidding war between two US based private equity firms, Clayton, Dubilier & Rice (CD&R), and Fortress Investment Group, it now has a market cap of £7bn. This makes Morrisons worth more than other FTSE 100 companies, including ITV and Weir Group.

In July, CD&R made a £5.5bn bid which was rejected by the Morrisons board who said that the offer “significantly undervalued” the retailer. Fortress stepped in with an increased bid of £6.7bn, which the board recommended to investors. Last week, Morrisons accepted an improved bid of £7bn from CD&R, leaving Fortress “considering its options.” 

The current share price is 5p more than CD&R’s 285p per share bid. It seems investors think that the takeover battle isn’t over yet. However, I suspect the UK takeover panel could soon step in to reduce its share price volatility. It might put Morrisons up for sale in a formal auction, which could see its share price increase further.

Bigger picture for the Morrisons share price

There’s a pattern forming of UK companies being bought out by US private equity firms. Back in 2012, CD&R acquired B&M European Value Retail on advice from Sir Terry Leahy, which it later sold for a £1bn profit. Sir Terry has a personal relationship with Morrisons chairman Andrew Higginson, who was CFO at Tesco while Sir Terry was CEO.

The value of the pound has not completely recovered from its pre-Brexit lows. This reduces the price of UK businesses when they’re bought in dollars. In the last eight months, foreign private equity firms have spent more buying UK companies than in the last five years combined. 

Foreign investment does show confidence in a post-pandemic, post-Brexit UK. On the other hand, private equity buyouts often include loading companies up with debt, selling their assets, and moving decision-making stateside. In the case of Morrisons, a key concern is that its real estate holdings could be sold and rented back. This would increase initial profits, but at the expense of long-term sustainability. With a price-to-earnings ratio of 72, the company now seems overvalued compared to Tesco at 26.

As a value retailer, Morrisons is also useful as a hedge against a potential stock market crash. Prior to the takeover battle, the company was clearly underrated, but I’m not sure its current valuation is justified compared to its competitors. Ultimately, I don’t think the Morrisons share price will rise much further. 

However, the wider trend of US private equity seeking value in UK firms intrigues me. I’ll be spending September looking for other potential bargains that may be targeted.

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.

Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value, Morrisons, and Tesco. 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

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »