Insider: Betting big on food and drugs

Moreish Morrisons

Morrisons lost 9% of its value in the aftermath of last month's full-year results. Underlying pre-tax profit of £302 million matched estimates but meant profit had declined four years in a row. Like-for-like sales were down, too, but up 0.1% in the final quarter of 2015.

As we knew, the full-year dividend was slashed from 13.65p to just 5p, but chief executive David Potts was more confident on the outlook. Work on the internet business, wholesale, services and lower interest costs should add another £50-100 million to the bottom line in the "medium-term".

Potts has also had something of a coup in sealing a UK online grocery delivery agreement with Amazon and existing partner Ocado. However, with the share price up around a third this year already, investors are struggling to justify the valuation - adjusted earnings per share (EPS) estimate of 11p for this year puts Morrisons shares on a forward price/earnings (PE) ratio of 17.8 times.

That's of no concern to Potts, however. He's just spent £363,000 on 180,000 shares at 201.62p each, taking his stake to over one million.

But he'll hope the retail team at Barclays is wrong. Analyst James Anstead doubts whether sales momentum can be relied upon to continue, given ASDA's intentions. Cash generation will be more modest in the coming year, too, and the Amazon arrangement is "helpful rather than transformative".

"We have made modest cuts (3-4%) to our EPS forecasts for the next couple of years, driven by slightly more cautious core sales and margin expectations. With an improved pension funding situation and slightly faster-falling net debt, our discounted cash flow-based price target rises slightly, from 155p to 165p."

Just a hiccup at Hikma?

Kicked out of the FTSE 100 this month, shares in Hikma Pharmaceuticals sank by over 8% when full-year results were unveiled mid-March. However, in a remarkable turnaround, the Jordanian drugmaker ended the session up over 5%.

The numbers were decent enough, but there are clear concerns about its recent $2.65 billion (£1.85 billion) acquisition of American generic drugs firm Roxane Laboratories. Last month it halved the upfront gross cash consideration by $535 million after finding out that Roxane's revenue for 2015 was lower than previously anticipated.

Revenue of $1.44 billion in 2015 was down 3%, or up 2% if you strip out currency moves, and more or less in line with consensus estimates. A 10% drop in earnings per share (EPS) to almost $1.27 was a smidge better than the average forecast.

"We consider the recent share price weakness (year-to-date -25%) overly discounts underlying growth expectations and, correspondingly, we move our 'hold' to 'buy'," said Panmure Gordon analyst Dr Mike Mitchell.

Well, Hikma shares are up 14% since, but chief executive Said Darwazah believes there's more to come. Darhold Limited, the holding company used for the Darwazah family's interest in Hikma, bought 30,000 shares at 1,972p.

The acquisition follows more modest purchases by directors Robert Pickering and Patrick Butler, both of whom bought 2,500 shares at 1,856p and 1,920p respectively.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.