Morrison still worth stocking up on

Wm Morrison (MRW) has endured a rough ride this year as all the major supermarkets compete aggressively to attract cash strapped customers. When the group reported falling half year like-for-like sales and profits in September, chairman Sir Ian Gibson pointed to commodity price inflation and fragile consumer confidence as two of the biggest challenges.

So it came as no surprise when a third-quarter trading update last month cited lower-than-expected sales: excluding fuel, sales were down 0.4 per cent and like-for-like sales declined 2.1 per cent. Moreover, government cutbacks along with flat wage growth mean consumer budgets will continue to remain under pressure next year.

Despite these risks, it’s worth pointing out that all of Morrison’s main rivals are facing the same economic headwinds and management do seem to be making the right moves. For instance, the stores are being spruced up with a 'Fresh Format' new-look, introduced to 35 outlets in the third quarter alone. Morrison's has also started to open superstores again, after months of inactivity and is revamping its own-brand products. Although it comes late in the day, a voucher system is finally being rolled out to compete with strong promotional activity across the sector. Finally, the supermarket is following Tesco and Sainsbury by investing in convenience stores and it opened an online wine operation in the second half of the year.

Espirito Santo says...

Sell. This should have been a good year for Morrison as the group rolled out its new Fresh Format. Instead, Morrison has been hit by Asda’s acquisition of Netto and now Tesco’s decision to lead the industry in crazy vouchering. Meanwhile Aldi and Lidl have been improving their offers and giving consumers an alternative. Trading on 9.4 times consensus forward earnings Morrison looks inexpensive but on our forecasts the shares are on 10.6 times our calandar 2013 EPS estimate which is too expensive. Expect full-year pre-tax profit of £904m and EPS of 27.1p, falling to £795m and 25.3p, respectively, the year after.

Oriel Securities says…

Sell. Disappointing third-quarter sales are unlikely to pick up much over Christmas or in 2013/2014. An unclear marketing plan leaves Morrisons vulnerable to increased competition and we continue to fear for forecasts. The move to stock more exotic, upmarket products while trying to force home the value image is too mixed a message and customers just don’t get it. Aldi and Lidl are taking advantage of this, winning market share, but high-end shoppers aren’t picking up the slack. Expect full year pre-tax profits to fall from £935m to £880m, giving EPS of 26.8p and a flat outcome next year.