LONDON -- London's financial district is home to hundreds of equity analysts. These highly paid experts examine the prospects of thousands of shares. Of all the shares in the FTSE 100, supermarket Wm. Morrison (LSE:MRW) is the one City analysts are most unhappy with.
This may sound like a reason to avoid the shares. However, long-established pessimism often provides the setting for a large share-price advance.
Morrisons has grown up fast to become one of the U.K.'s largest supermarkets. In the last five years, its sales have increased 50%. The dividend to shareholders in that time has more than doubled.
The problem is that rivals have raced ahead of Morrisons with comprehensive online, convenience, or nonfood offerings. Worse still, Morrisons has recently been losing market share to budget rivals Lidl and Aldi. These factors have led concerned analysts to recommend that the shares be sold.
As the competitive landscape has become tougher, Morrisons' shares have suffered. In the last 12 months, the FTSE 100 has advanced 11.3%. In that time, Morrisons' shares have fallen 3%. However, there are signs that sellers of the stock may be finished: In the last three months, Morrisons has significantly outperformed the market, rising 11.2% versus the FTSE's more modest advance of 2.3%.
This revival has likely been inspired by signs that Morrisons is committed to new growth initiatives. The company is currently in partnership discussions with Ocado. This could see Morrisons soon providing an online service. It has also purchased a large number of former Blockbuster stores that it plans to convert to its Morrisons' "M Local" offering.
The recent softer trading means that earnings per share are expected to make little progress this year or next. The dividend is expected to continue increasing ahead of inflation, reaching 13.3 pence for 2015. These forecasts put the shares on a 2014 P/E of 11, with an expected yield of 4.4%.
Talks with Ocado and the Blockbusters deal show that Morrisons is serious about moving to the next level. At today's valuation, the shares offer a great opportunity to back management's planned transformation. A handsome profit could be made if the bears can be turned into buyers.
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Fool contributor David O'Hara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.