How Wm. Morrison Supermarkets Measures Up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth At A Reasonable Price," or GARP, strategy.

This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below one is generally considered decent value for money.

Today, I am looking at Wm. Morrison Supermarkets  (LSE: MRW  ) to see how it measures up.

What are Morrison's earnings expected to do?

 Metric 2014 2015
EPS Growth -5% 3%
P/E Ratio 10.1 9.8
PEG Ratio n/a 2.9

Source: Digital Look.

Morrison is expected to buck four years of consecutive earnings growth with a slight profit dip in the year ending January 2014, although a modest rebound is anticipated by City analysts in the following 12-month period.

The current-year's expected profit slip results in an invalid PEG rating, while next year's slight recovery is not enough to drag the reading into value territory.

The company's price-to-earnings (P/E) ratio for the medium term is anchored close to the benchmark of 10 -- a reading around or below this measure is considered decent bang for your buck -- although the current rating reflects the supermarket's murky earnings outlook.

Does Morrison provide decent value against its rivals?

Metric  FTSE 100 Food & Drug Retailers
Prospective P/E Ratio 14.9 65.4
Prospective PEG Ratio 4.5 8

Source: Digital Look.

Morrison's invalid PEG ratio for the current year underlines its dim earnings prospects in comparison to the FTSE 100, and broader food and drug retailers sector, although the firm's cheap P/E rating beats that of both of these groups.

A handful of firms skew the readings for the food and drug retailers sector, however, so it is worth tallying up Morrisons' figures against fellow retailer Tesco. Expectations of modest earnings growth in 2014 result in a forward PEG rating of 15.6 for Tesco, while its P/E rating comes in at a decent 10.4.

Morrison does not qualify as a quality GARP stock at the present time, and I believe that the firm is likely to experience further heavy earnings pressure before its recovery strategy begins to pay off.

Indeed, in my opinion, the company lacks both the financial clout and retail expertise of industry leader Tesco to deliver a compelling turnaround story.

Customizable conclusion
Morrisons announced in May's interims that, excluding fuel, group sales advanced just 0.6% during the first quarter of the year. And like-for-like sales actually declined 1.8% during the three-month period.

The company continues to lose market share to retail rivals, including Lidl and Aldi. Latest data from industry researcher Nielsen showed Morrisons' sales rose 1.4% during the four weeks to May 25, but with a contribution of some 2% from new retail space, the performance indicated the group continues to lose on a like-for-like basis.

By comparison, sales at Aldi and Lidl rose 29% and 10%, respectively, while sales at J. Sainsbury and Asda clocked in at 5.3% and 2.9%, respectively. Morrisons did outperform Tesco, however, where sales rose just 0.5%.

Enduring difficulties in the U.K. retail sector -- combined with fierce competition as lower-end chains up their game, and the middle ground becomes more price competitive -- leaves Morrisons in somewhat of a quandary, in my opinion.

Recent moves into online shopping and better exposure to the more profitable convenience store sub-sector bodes well for future earnings, but I expect more sales pain to materialise in the near future.

The expert's guide for intelligent investors
Although Morrisons currently presents too much risk, in my opinion, this newly updated special report highlights a host of other FTSE winners identified by ace fund manager Neil Woodford.

Woodford -- head of U.K. Equities at Invesco Perpetual -- has more than 30 years' experience in the industry, and boasts an exceptional track record when it comes to selecting stock market stars.

The report, compiled by The Motley Fool's crack team of analysts, is totally free and comes with no further obligation. Click here now to download your copy.

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