Wm Morrison Supermarkets: Buy, Sell, or Hold?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market. Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold -- and those I feel you should sell!

I'm assessing every share on five different measures. Here's what I'm looking for in each company:

  1. Financial Strength: low levels of debt and other liabilities.
  2. Profitability: consistent earnings and high profit margins.
  3. Management: competent executives creating shareholder value.
  4. Long-term prospects: a solid competitive position and respectable growth prospects.
  5. Valuation: an underrated share price.

A Look at Wm Morrison Supermarkets
Today I'm evaluating Wm Morrison Supermarkets (LSE: MRW.L  ) , a food and grocery retailer that currently trades at 296 pence. Here are my thoughts.

1. Financial Strength: Despite net debt increasing during the last few years due to increased capital spending, Morrison's gearing still remains low at 32%. It has ample liquidity, with 297 million pounds of cash and cash equivalents on the balance sheet and access to an undrawn 900 million pound credit facility. Also, attesting to the strength of its balance sheet, it is one of only three European retailers with an "A3" rating from Moody's.

2. Profitability: Morrison's performance during the past decade has been excellent, having grown revenue 17% and underlying profit before tax 14% annually. Dividends per share have compounded 17% per year, while earnings per share have increased 9% annually.

The 10-year average return on equity and return on capital employed have been decent at 11% and 12%, respectively. While operating margins were erratic during the early part of the decade, they have been steady for the last five years at about 5%.

3. Management: Dalton Philips was named chief executive in March 2010. Though lacking experience in the U.K. food industry, Philips has a proven retail pedigree: Prior to joining Morrison, he was chief operating officer of Loblaw Companies, Canada's largest food distributor. He was also CEO of Irish department store group Brown Thomas and has been chief operating officer of Walmart's German operations.

In 2011, the company started a share buyback program with a target of returning 1 billion pounds -- 628 million pounds of which already has been spent -- to shareholders by March 2013. The supermarket has also committed to delivering double-digit dividend growth per year until fiscal 2014.

4. Long-term prospects: Morrison is the fourth-largest retailer in the U.K., with a market share of 13%, yet it still has a lot of room for growth with 6.8 million out of 23 million households still not having nearby access to a Morrison store.

In the last two years, the retailer has invested heavily in accelerating new store openings, developing its "multi-channel" capability, and improving cost efficiency with upgrades to its logistics, retail, manufacturing, and IT systems. Also, the group's "M" label brand and "fresh format" strategy, which has been implemented in 45 stores, have delivered encouraging results.

5. Valuation: Morrison's valuation multiples -- a forward price-to-earnings ratio of 11, a price-to-tangible-book ratio of 1.5, and a price-to-cash-flow ratio of eight -- are at the lower end of their historical averages. At 296 pence and backed by the company's dividend growth policy, the shares offer a prospective yield of 4.4%.

My verdict on Wm Morrison Supermarkets
Competition in the supermarket sector will be tough in the coming years as retailers compete for consumers' declining disposable income.

However, I believe Morrison's recent initiatives, together with its cost-efficient operations and the company's still-untapped potential in the U.K. market, will allow it to maintain adequate returns on capital in the coming years.

Moreover, the shares look modestly cheap and give an attractive yield in excess of 4%, while the company's share buyback program and progressive dividend growth policy should provide a short-term boost to investor returns.

So overall, I believe Wm Morrison Supermarkets at 296 pence looks like a buy.

More FTSE opportunities
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In the meantime, please stay tuned for my next verdict on an FTSE 100 share.

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Zarr does not own shares in Wm Morrison Supermarkets. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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