"From LSE:TSCO:Tesco's recovery to the peak trading test of Argos shops in LSE:SBRY:Sainsbury's, there's plenty riding on updates from the big food retailers in the coming days.Sales in festive week can be double normal levels, but the Christmas ..."
I'm heading to their Weybridge store this morning to buy some spirts
as Christmas presents. It may be my lack of technical literacy, but there
did not appear to be a click and collect option, so unable to check product availability.
I fail to see what DIRECT reference this (or your previous 2 messages) has Wm. Morrison Supermarkets - or am I missing something. I know you mention 'shorters' targeting M & S etc but I think this sort of message should not be on a specific company message board other than those mentioned.
I read this board for COMPANY SPECIFIC comments.
Incidentally, I think Morrison's have got a super team on board right now, and I am keeping my holding for a rise towards 300p by about Jan. 2019 (14 months time) + dividends getting back towards their level of 2 - 3 years ago
When the short and distort maneuver succeeds, investors who initially bought stock at higher prices sell at low prices because of their mistaken belief that the stock is worthless, caused by an effective distortion campaign. At the same time, the S&Ds cover at low prices and lock in their gains.
Right after prominent bankruptcies such as Enron in 2001 or Nortel in 2009, investors could be more susceptible to this type of manipulation than during prosperous periods such as the 1990s in the U.S. During downturns, the first appearance of impropriety could cause investors to run for the hills much easier. As a result, many innocent, legitimate and growing companies could get burned, and investors along with them. (To learn about how you can profit when everyone else is heading for cover, read Profit From Panic Selling.)
How to Identify and Prevent S&D
1.Do not believe everything you read - verify the facts.
2.Do your own due diligence and discuss it with your broker.
3.Hypothecate your stock - take it out of its street name to prevent the short sellers from borrowing and selling it. (Learn more about doing your own due diligence in our related article, Due Diligence In 10 Easy Steps)
The best way to protect yourself is to do your own research. Many stocks with great potential are ignored by Wall Street. By doing your own homework you should feel much more secure in your decisions. And, even if the S&Ds attack your stock, you will be better able to detect their distortions and be less likely to fall prey to them by selling the stock at a loss.
Holiday Shopping Still Dominates
The busiest period for brick-and-mortar stores is still the Christmas holiday shopping season. This stretch of time between Thanksgiving and the end of the calendar year has become ever more competitive, with brick-and-mortar retailers increasing hours and running near-constant promotions. In recent years, some large retailers have even opened stores on Thanksgiving Day and Christmas Day, which resulted in a fair amount of backlash from customers and employees.
But the picture has not been perfect for online retailers over the holidays in the last few years, either. Procrastinating shoppers who waited until the last minute to order holiday gifts online overwhelmed the package delivery companies that online retailers rely on, resulting in packages delivered late or after the holidays.
So there are plenty of pros and cons for both brick-and-mortar and online stores when it comes to retail's busiest shopping period.
But that's not the end of the story. Amazon.com is now opening its own bricks and mortar stores. they have learned that a significant portion of the population will only by in s store and so the once giant of online is now a back and mortar retailer.
Hi Bill, very much appreciate your view, and reply, as always.
I have KGF on a watchlist, they also have an aggressive share buy back
KGF arguably more cyclical and I noted the recent Homebase figures in the Westfarmers
update(they also own Target in the US from memory) which painted a weak picture imv.
Screwfix looks the jewal in the crown, however they have significantly grown that
business during begine conditions. Would assume there is flexibility in the cost base
should trading conditions toughen, to mitigate at least some of this.
"Which is the better value?... Any views appreciated."
As always, you have to look at the whole valuation picture, from a number of angles - while putting it in the context of the respective market sectors and competitive positions.
On an earnings basis, 13.8x prospective P/E for KGF vs 17.6x MRW... KGF looks the cheaper, prima facie, though hardly that cheap against the market or a challenged retail sector (with valuations that reflect this). And MRW earnings have been in decent recovery for a couple of years, with this forecast to continue - while KGF EPS has been flat-lining in recent times, and will likely be down a bit this year. The inference is you don't have to look too far ahead to see this P/E gap converge - unless something happens to arrest the current trend.
It's a similar story on EV/EBITDA, though the gap somehat narrower - 6.2x KGF vs 7.5x MRW (actual last FY). Again, undemanding relative to the market, but hardly exceptional within a sector abundant with undemanding valuation metrics. Likewise, FCF is attractive for both, though actually more so for MRW currently (10-11% FCF yields last 2 FY) than KGF (around 7% each of last 2 FY) - and there are plenty of big FCF yields across the UK retail sector.
Both have very well-covered dividends - KGF with better EPS cover, but MRW much better FCF cover - yet neither stock is a stand-out income play, with KCF yielding slightly more (3.4% vs 2.8% prospective) but MRW probably offering the better forward growth profile. Not much to choose between them here - but there are plenty of better yield stories elsewhere, even just within their own sector.
On balance sheet strength, you would pick KGF - sitting on significant net cash. But it is hardly a weakness for MRW, with strong freehold asset backing, relatively low leverage (1.4x ND/EBITDA last FY) and the strong FCF likely to reduce this steadily further.
Overall, then, KGF is arguably a bit "cheaper" than MRW, but it depends what you want to focus on, not much in it IMHO - and MRW unarguably has the better operational momentum and financial trajectory at the moment. So perhaps a toss-up as to which is the "better value"... and of course, both are operating in tough markets experiencing both structural issues and fierce competition, neither of which is likely to alleviate any time soon.
Personally, of the two, I would probably buy MRW - but then, I am more impressed by FCF than others might be. And I am not sure either would be that high up a list of "best value" UK retail plays at current prices...
Or so says Shares magazine - which also says Buy at 217.8p.
Full text from today's edition below:
"A downwards drift at WM Morrison Supermarket (MRW) presents a buying opportunity before the grocer unwraps its Christmas trading update (9 Jan 2018). Chief executive David Potts charge has reported an eighth consecutive quarter of like-forlike sales growth, up 2.5% (ex-fuel) in the third quarter to 29 October.
Though representing a modest slowdown on the prior quarter, Shore Capital believes Morrisons enters the forthcoming peak trading period in good shape and on the front foot. Shielding cash-strapped shoppers from the impact of lower sterling, Morrisons Price Crunch and Way Down promotions are pulling in consumers and its Best premium own label range has been dramatically expanded in time for Christmas.
Vertically integrated, the grocer is building out its wholesale business with Amazon UK and forecourts operator Rontec, while preparing to supply neighbourhood retailer McColls (MCLS) from January 2018 in a deal that revives the Safeway label.
Forecasting a rise in pre-tax profit to £365m (2017: £337m) this year ahead of £407m next, Shore stresses Morrisons is a business with a strong financial constitution. Year-end net debt will have fallen below £1bn for a comfortable leverage ratio of 1.1 times, Morrisons has a strong balance sheet with freehold backing, not to mention a progressive dividend and a pension surplus."
Yes SBRY prices steep, even local Waitrose cheaper on many items.
Quality of Morrisons meals.....mmmmm not too sure on that
BIG improvement for Morrisons would be for our local stores to actually consistently have the correct pricing! Twice in the last 8 days been in to local store and a product has been at SBRYs level when in actual fact should have been on promotion at 30% less. Twice I have gone elsewhere only to find out today re the issue. This was the same BASIC issue I flagged up with them and HO last year. In BOTH cases I was promised a call back but nothing materialised....(including the one from HO). IF (or possibly when) MRW can address this issue then they will stop losing sales and progress could be made, but there is enough competition out there to make sure that everyone should be hanging on to whoever comes though the door, not going out with an empty basket.
The contention that it was the Amazon deal which artificially boosted the SP (rather than improved management and performance) doesn't seem to fit with the SP history. The Amazon deal was struck in late Feb 2016. SP closed at 199p after the Amazon news. By June it was back at 175p and stayed lower than that Feb close until September. Meanwhile the shorting interest kept expanding to be over 19% by October/November. Potts was getting on with the job, improved lfl, reduced debt etc.
The recent SP weakness is just part of an overall bearishness on anything retail. Any results which are not above forecast seem to be met by a sell-off.
"Beyond that, there is the medium term M&A theme... pretty sure we will see more of it in Food Retail."
Well I have to say, Morrisons food is far better than anything at Sainsbury or Tesco and their home branded meals are excellent.
It's more the shebang of the market that'll keep dragging it it all down methinks !!
It's not a major fault of MRW as they seem to have steadied the ship, it's just the competition like Aldi, who's food is also generally pretty good with a few exceptions, but they keep slapping up a shop with in yards of MRW, SBRY and Tesco and it's forcing them to compete.
Well in many respects some are not doing so -- everything in Sainsbury is still overpriced, like a standard 500ml bottle of beer (any brand you can think of) starts at £1.8 a bottle and £1.19 in the competition -- so many many products are an order of magnitude more expensive for the same item with the same quantity involved.
"Bill, unsure the valuation differential with SBRY can be justified?..."
Short answer, Essential - it can't. SBRY is cheap relative to MRW IMHO... though less easy to say by how much, and the situation gets more clouded the more you delve into it.
SBRY earnings were down last year, and likely to decline again this year... albeit moderately. MRW meanwhile has delivered decent earnings growth (ie. recovery) for a couple of years now, and this is forecast to continue into the medium term - though at a slowing rate. This divergent trajectory is not enough to square off the current significant valuation (on P/E) gap, but it does explain part of it, and it's understandable that SBRY may struggle to outperform until it proves earnings have bottomed (NB. consensus forecasts an EPS recovery in 2018/19).
On EV/EBITDA, the valuation is gap is still there but more modest (7.6x MRW vs 6.1x SBRY, most recent actual FY), and looks set to close appreciably again this year - reflecting MRW's relatively stronger balance sheet and cash flow profile. Of course, neither looks expensive on this basis, relative to both the market and to TSCO, which trades on over 9x.
And MRW is actually the "cheaper" on FCF yield, 10-11% last 2 FY vs 8-9% for SBRY. This is likely to decline somewhat this year for both, but it's a crucial and under-appreciated metric IMHO, both in absolute and relative terms, and one to keep a close eye on (and of course, both look absolute "cheap" on this measure, around 2x the UK market average).
So overall, I see SBRY trading at a big discount to "fair value", and MRW much less so (albeit getting more attractive now) - but equally, I understand why we'll probably have to wait for any meaningful catalyst to see any sustained narrowing in this differential.
"On a wider market point, just looking at some of the savage (recent) post results sell offs, wondering if this is indicative of a market top, or some significant interim peak forming..."
Yes, certainly suggests a market where further upside will be harder to sustain - but equally, it does show me a market much less likely to crash. With the latter, you tend to see increasingly irrational exuberance in the run up to a correction - yet we are currently seeing the opposite?
"It looks a la la land valuation to me as I've posted elsewhere previously..."
Essential - at the current SP, 11%/10% FCF yields for the last 2 FY... not so much "la la land", more Butlins - cheap and cheerful!?
FCF will likely trend lower this year, but these figures - on an already depressed profit base, don't forget - attest to the medium term potential. With further support to earnings from balance sheet "optimisation" (in due course) as they throw off surplus cash.
"... having said that Amazon may pounce."
Yes, indeed - see my previous post on the "M&A theme". Things will definitely happen in this sector - just not as sure exactly what!
"Based on it's current P/E, it's tiny 2% profit margins, it's modest yield and the massive supermarket comp, wouldn't 150-175 be the right sort of level to take on the risk of the ever growing depletion of the business to the comp?"
Yes, still in MRW, not a huge holding. Not amazed to see it settle back a bit, it managed to defy gravity at a pretty full rating for some time - unusual indeed in this market for anything "UK" or "retail" - and even today it is not massively out of line with 'fair value' IMHO.
I think your price range may be about right, if earnings were now plateauing... and without doubt, the top line and market share will remain under concerted competitive attack for the foreseeable. But I think there is a lot more to go for, on margins and profitability, even on a lower business base... and operational momentum to this end remains very good for MRW, as per last week's trading update, and as it has for a while now.
MRW has specific advantages over peers... the margin opportunity is greater due to their vertically-integrated structure, the balance sheet is better and FCF has been particularly compelling - it is the latter that keeps me invested, more than anything.
But on a risk/reward basis, I can understand anyone hesitating to commit new money... if they can meet forecast expectations over the next 2-3 years (and from the above, I think they can - at least) I think the shares will perform at least fine from here. But I don't see scope for spectacular returns, and there is then the risk that management delivery falters again in a tough environment.
Beyond that, there is the medium term M&A theme... pretty sure we will see more of it in Food Retail. And there are scenarios here which could be very positive for MRW... albeit not all of them, of course! But it is another reason to keep me invested, in a moderate way...
"""MRW has held up well for a while, and the valuation remains full, with at least most of the good news already in the price."""
Bill - you still holding this?
I sold this for 248 in January and it seemed expensive then, as it does now at 219.
Based on it's current P/E, it's tiny 2% profit margins, it's modest yield and the massive supermarket comp, wouldn't 150-175 be the right sort of level to take on the risk of the ever growing depletion of the business to the comp?
"There are plenty of ideas and guidance provided for novice investors which typically revolve around standard rules such as invest regularly, don't panic when things go wrong, invest for the long-term etc - all of which are perfectly reasonable ..."
"And I thought this was a decent Interim report..."
NB - yes it is, on a number of levels. Though nothing particularly new - merely a general continuation of recent trends, many of them positive. And no change to forward projections, for the most part - save for a modest upgrade to expected contribution from ancillary areas.
I hear the talk of "slowing momentum", but really, that is reading too much into it IMHO... things like LFLs move around from period to period, the underlying trend is still good.
No, this is a simple case of travel-and-arrive for me... MRW has held up well for a while, and the valuation remains full, with at least most of the good news already in the price. Not much more to go for, in the short term ... though if it falls much more, it will quickly be back in attractive territory.
"Bank of England interest rate decisionRising inflation, an economy ticking along and strong jobs market may have got the interest rate hawks squawking, but it will be months before they get their way.Higher borrowing costs are inevitable, and ..."
That 2.50 hurdle has been tough. It did close above briefly on Aug 7 (250.2) but above that level it would be the highest close since Jan 2014. The next price mover could be the interim results on the 14th Sep.
In Jan 2014 the short position was 4%, currently it is still above 15%. If the shorters finally capitulate and agree this isn't the next Carillion there should be a sustained SP increase with their continual buybacks to square their positions.
Asda are still cheaper than the other majors on branded goods, albeit now not by that much. So how come they still seem to make so much more money compared to the others. I suppose Walmart buying power means cheaper cost prices.
Sainsbury 500 pre tax on 26 billion turnover, again that's not as good as Asda on the crude figures.
Do MRW and SBRY have some sort of cash drain that Asda don't have. I guess MRW wholesale will be lower margin and online food sales will contribute to turnover but not to profit. However Asda also has a profit-sapping online division.
One possible answer may come from comments a few years ago by Richard Clarke at Bernstein Research.
"Richard Clarke, an analyst at Bernstein Research, said the company currently had incentives to book more profits in the UK because of the UKs lower corporate tax rates compared with the US."
"Clarke cautioned that it was not possible to unpick Asdas reported figures fully because, as a private company in the UK, it did not have to report in as much detail as publicly listed rivals."
Herald - it is probably less surprising that Asda's margins look to be holding up relatively well. There last few years of fierce incursion from the discounter have seen the rest of the "Big 4" sacrifice margin to protect sales volumes... yet for at least most of this period, Asda has quite publicly preferred to do the opposite.
So they have seen much bigger declines in volumes and overall market share... so I would imagine, if you compare current revenues to previous years, that is where the results will look so "bad".
Time will tell which strategy will have proven the most economically "successful" (if only in relative terms)... possibly too early, even now.
However when you compare it to MRW it doesn't look so bad. So what else should be considered in the comparison. I suppose trend is the big negative for Asda and a positive here.
The most recent MRW accounts report a pretax figure of 325m on turnover of 16.3billion. The market could be viewing the 145m of finance costs as something which will eventually be significantly reduced which when removed completely gives a figure of 468m "operating profit".
However still the ASDA figure doesn't look as bad as everyone paints. Strictly on a turnover comparison MRW should be recording almost 600m to be parallel with Asda.
"Ernest Hemingway once stated "there is no friend as loyal as a book". In considering its unfathomable rise from humble online bookseller to global retail sector dominance, there is clearly no-one as loyal as an NASDAQ:AMZN:Amazon customer.Having ..."
Commentators on the crumbling construction group Carillion have indicated it should have been obvious to private investors that the company was in trouble in view of the massive short position. 25-30% of the company had been sold short.
The actual short figure may be higher since companies under the 0.5% threshold do not need to declare. The figures can jump around when previously undeclared positions pop up eg the Anchorage and Melvin groups have appeared for the first time in the last month.
Food retail is a massively competitive business. But why is MRW being targeted specifically as being so weak that the hedge funds think this company is the one most likely to fail?
One hedge fund indicated it had targeted Carillion because of a red flag warning when it saw it was attempting to delay payments to suppliers. "When we see payment terms lengthening it's a red flag and that's why we shorted it." FT article, "Carillion fights for survival after share price crash". In contrast we had MRW making a recent commitment to shorten payment terms to suppliers http://www.fruitnet.com/fpj/article/171772/morrisons-shortens-payment-terms
MRW has a surplus. See page 16 of annual report, "The assumptions relating to the pension schemes remain prudent. The net surplus on the balance sheet is £272m, an increase of £86m since last year. In the period, with the Trustees, we completed the triennial funding valuation which shows a funding surplus in each of the three schemes."
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