How The Horsemeat Scandal Could Benefit Wm. Morrison Supermarkets

LONDON -- Over the last few months, Wm. Morrison Supermarkets  (LSE: MRW  )  has been increasingly tipped as a likely prospect -- either as a value play, a recovery play, or an income play. And given its status as a defensive stock on a forecast price-to-earnings (P/E) ratio of 10, and a forecast yield of 4.9%, it's easy to understand why.

Putting the company's income attractions to one side, though, until recently it's been difficult to see where exactly the upside could come from.

Yes, the business is now aggressively moving into the local convenience store market, and has picked up 49 former Blockbuster stores in the last few days. But others, such as Tesco, are much further ahead. Online? Yes, Morrisons is dipping its toe into the water. But others, such as Tesco, are much further ahead. Brand extensions, such as banking, telecommunications and so on? A recent deal with Lakeland is a start -- but others, such as Tesco, are further ahead. And so on.

Farm-to-fork
The horsemeat scandal provides Morrisons with something of an opportunity, I believe. Here is an area where Morrisons, for once, is much further ahead of its rivals.

Let's start with a simple quiz. Name Britain's largest food manufacturer. And here's the rub: thanks to its firm policy of farm-to-fork vertical integration, Britain's largest food manufacturer is now... Morrisons. Formerly Britain's second-largest food manufacturer, Morrisons is now top dog.

That's right. The company owns 18 food manufacturing plants, employing 7,000 people. And that employment figure, I'd stress, excludes the people employed in Morrisons' in-store bakeries and so on. Other companies -- such as Greencore, for instance -- have more employees, but not as many located purely in the U.K.

Quite simply, Morrisons buys its meat straight from the farm, sends the animals to its own abattoirs, and butchers it directly in its own stores. Critically -- and here's where some of those food manufacturing plants come in -- it also supplies its own food preparation sites with meat, in order to make its own pies, sausages, cooked meats and other products.

Vertical integration
Now, that's a very different business model from that adopted by most of its competitors. And up until the last three weeks, Morrisons has been promoting this model by extolling the benefits to farmers, better quality control, less waste and better use of resources.

But with the horsemeat scandal now breaking over even giants such as Nestle -- which must, I reckon, have thought that it must have been immune from the risk -- fate has handed Morrisons a marketing card that its competitors can't quickly deploy for themselves.

For with its farm-to-fork supply chain, Morrisons can be more assured than most that horsemeat isn't entering its supply chain. The challenge ahead: persuading fastidious customers of upmarket outlets such as Waitrose and J Sainsbury that Morrisons should be their meat products purveyor of choice.

Upside
On a P/E that's currently a fair bit below the market average, and with movement afoot in terms of the Blockbuster and Lakeland deals, I reckon that Morrisons has probably more upside than downside. Factor in a boost from the horsemeat scandal -- assuming the business has the marketing nous to leverage it -- and that upside could be considerable.

Heck, even if Morrison's were simply to reach the FTSE 100's average P/E, that still implies a 30% uplift on today's share price.

Even so, if you're looking for a company that should soar in price, there are other juicy prospects out there. Here at The Motley Fool, for instance, we've recently pinpointed our favorite growth share for 2013, and produced a free report in which we evaluate its finances and risks, and its growth prospects going forward. Simply click here to get your copy delivered to your inbox immediately.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2263303, ~/Articles/ArticleHandler.aspx, 4/19/2014 10:36:55 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

TREND TRACKER: Get Rich When the Web Goes Dark

It's time to say "goodbye" to your Internet! One bleeding-edge technology is about to put the World Wide Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism… The Economist is calling it "transformative"... but you'll probably just call it "how I made my millions." Big money is already on the move. Don't be too late to the party – find out the 1 stock to own when the Web goes dark.


Advertisement