I originally brought Morrisons (LSE: MRW) shares as I thought the company looked cheap. At around 180p per share, the company was trading below the value of its property on the balance sheet and book value, after for accounting for liabilities.
However, over the past six months the UK retail market has changed drastically, and Morrisons has started to look over, not undervalued.
Changing landscape
For more than a year, it’s been clear that Morrisons is struggling to compete in an increasingly competitive retail market. Nonetheless, Morrisons has the tools available to it to make a comeback. Unfortunately, the company is not moving fast enough.
Indeed, Morrisons has long been criticised for failing to keep up with the rapidly changing retail environment. For example, the company has only really entered the online market, its attempt at a customer loyalty scheme leaves much to be desired and the company’s in-store offering is is disappointing when compared to the likes of Tesco.
Still, Morrisons was founded on the ‘stack em high, sell em cheap’ mentality that has helped upstarts Aldi and Lidl snatch market share from their larger peers. And after spending several years trying to go upmarket, Morrisons is now trying to return to its cheap and cheerful strategy in an attempt boost sales.
But even though sales should, in theory, receive a boost from this strategy, earnings are set to take a big hit. In particular, City analysts expect Morrisons to report a pre-tax profit of £400m for the year ending 31 Jan 2015. Earnings per share are set to fall to 12.5p. These figures put Morrisons on a forward P/E of 13.9, which looks expensive considering the state of the UK retail market.
What’s more, unlike peer Tesco, which deserves a premium valuation due to its market leading position and international exposure, there’s no obvious reason to pay a premium for Morrisons’ shares.
Asset value
Having said all of the above, what really attracted me to Morrisons in the first place was the company’s property portfolio. However, there have been several developments recently that lead me to reconsider this valuation metric.
Firstly, Morrisons is selling a large chunk of its property to pay off debt and fund its lofty dividend. And secondly, as the UK retail environment changes, there’s a very real possibility that the value of Morrisons’ large superstores may be marked-down as their earnings potential evaporates. These two factors could quickly erase Morrisons’ asset value and shareholder equity.
All in all, there’s just too much uncertainty surrounding the company and its outlook right now. So, I’ve now sold my Morrisons holding, and I’m looking for opportunities elsewhere.
