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Morrisons share price: what to expect from first-half earnings

While trading on a relatively low forward PE, Morrisons faces several hurdles, while its shares continue to fall.

Morrisons Source: Bloomberg

Morrisons earnings – what does the City expect?

Headline earnings per share (EPS) are expected to be 6.4p per share, up 2.6% over the year, while revenue is forecast to rise 1.3% to £8.9 billion.

After a strong 2018, the supermarket faces slowing growth, as tough comparatives kick in. Last year (2018 calendar year) saw the World Cup and several heatwaves, boosting consumption. Thus, profit growth will have to come from online channels and its wholesale division, but both of these are already mature, limiting the pace of growth. The ruthlessly competitive nature of the UK supermarket sector makes it tough to raise prices, but the firm’s potential as a food maker, rather than just a retailer, will help it to boost growth.

For supermarkets, Brexit hangs over everything. The UK economy could be in a very different place come 1 November, both in a good way and a bad way, or indeed it could also be in exactly the same place. This makes it very difficult for supermarkets to plan ahead. But a weaker pound will continue to put pressure on earnings, thanks to the higher cost of imports hitting profitability.

Morrisons trades at just 13 times forward earnings, the lowest level since the second half (H2) of 2014, and far below its five-year average of 16.7. This might not sound like much, but supermarkets are not known for wide ranges in valuation (the peak of the past five years has been 19 times earnings).

How to trade Morrison’s earnings

The average move on results day is 4.3%, but at present options pricing points towards a move of 4.6%. Of 18 analysts currently covering the shares, six have ‘buy’ recommendations, with nine ‘holds’ and ‘three ‘sells’.

Volatility in Morrisons shares has been rising since a low in April, with the 13-day average true range (ATR) rising to 3.7 from a low below 3 in April. However, it has some way to go before it returns to the late 2019 peak at 5.6.

Morrisons shares: technical analysis

Worryingly for investors, Morrisons shares have broken below their lows of late 2017 and early 2018. This loss of 185p sends a bearish signal, and we may see further selling from here. Significant lower highs have been seen twice this year, in February and then July, confirming the bearish trend. As a result, rallies will continue to find sellers below 210p, with a move above this level needed to suggest a more bullish movement in the long term.

Morrisons chart Source: ProRealTime
Morrisons chart Source: ProRealTime

Morrisons faces tough headwinds

Morrisons enjoyed a good 2018, but the 2019 share price performance has been much tougher. As a result, the firm needs to come up with something impressive to revive investor confidence, but it is far from clear what that will be. Widening partnerships with online delivery firms is one thing, but compared to Tesco it is still a relatively modest player. While cheap at 13 times earnings, the ongoing decline in the share price leaves it a target for shorting.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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