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Continuing our tour of the UK supermarket sector we come to WM Morrison Supermarkets PLC. Looking at its recent share price performance, the company has had a good run of it, but the fund management sector seems less convinced and nor do the analysts. At the very least, this means that WM Morrison is NOT a stock to buy going into the turbulence of Brexit talks with Brussels and the prospect of domestic UK inflation.

At the time of writing, the share price was 245.59, up from about 192 in September. This will have been a pretty good run for its shareholders. It’s been a little less convincing in the last three months, hitting 245.77 in January and developing a nice head and shoulders pattern as it rumbled into the end of February.

Among the latest funds to raise their shorts on WM Morrison are hedge fund Marshall Wace, Millennium International Management and Citadel Europe. Maverick Capital has been particularly bearish on the stock, only slightly trimming its short position from a high in November 2017.

The analysts are fairly negative too – of 16 covering the stock, a median target has been set of 210 over the next 12 months, with a low forecast at 165. Barclays reiterated its underweight rating on Morrisons only today while HSBC called it a ‘reduce’ on 17 February.

The fourth largest supermarket chain in the UK, Morrisons has seen grocery sales ticking up in the 12 weeks to the end of January, but this is to be expected given the Christmas shopping period. It is the best performer among UK supermarkets over the period, with the likes of J Sainsbury flat year-on-year and Asda seeing a decline.

The real question is going to be who Morrisons is going to compete against. Sector analysts are already aware of the increasing share of the UK market held by German discounters Aldi and Lidl, which now control over 10% of the British market between them, up from 9.8% a year ago.

Last month Morrisons announced it would be spending more time on sourcing food within the UK was part of its local foodmakers campaign. Shoppers are in favour of the move, and it makes strategic sense as prices for imported good begin to rise, even before Brexit is negotiated. Much of this inflation has been driven by the falling pound, so buying food within the sterling zone is good news.

Hargreaves Lansdown has been bullish on Morrisons, pointing out that financing costs are falling and with 85% of stores held as freeholds, this means low rental obligations. However, it also sounds a cautionary note:

“The fall in sterling after the referendum has complicated matters…With the cost of imported goods rising, relationships all the way down the chain from producer to consumer are at risk of disruption. While it will want to keep prices low, the group now has little room for manoeuvre if suppliers refuse to take the hit. Profit margins, at just 2.1% last year, are already less than half of what they were in 2012.”

Let’s not go back that far – take a look at 2015 when Morrisons was involved in a price war that saw its sales slip, as it sought to compete in the discount market. This is where the battle is likely to prove particularly bloody in 2017. In 2015 Morrisons saw sales slipping as it engaged in a price war with Aldi and saw its market share in Scotland eroded by Asda and Sainsbury. Morrisons came off worst there, prompting a fall in its share price, but has since fought its way into a more profitable market position. It seems to be operating in the sweet space between the ‘hard core’ discounters like the German chains, and the struggling mid-market providers, like Sainsbury. But can it maintain that balancing act in more turbulent market conditions?

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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