Investment Column: Fall in Morrison's shares an opportunity

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The Independent Online

Morrison's

Our view: Speculative buy

Share price: 276.2p (+0.6p)

MORRISON shares have hit the skids in recent days as investors grapple with what to do about the curveball thrown at the group by the departure of chief executive Marc Bolland for M&S. Does this, then, represent a buying opportunity or is it better to sit back and wait?

Under Mr Bolland WM Morrison has been transformed from an ugly investment duckling, wallowing in the mud following the merger with Safeway, into a swan. While due credit must go to the company's leader, he could not have done it without a strong team, who remain in place, for the moment.

A testament to their work has been the way that the company has moved from the slow lane to become a pacesetter in the supermarket stakes, growing faster than any of its three main rivals.

But maintaining this will not be easy. The next set of same store sales numbers will probably look less stellar than recent outings because of strong comparative quarters, although the economy has improved, so the company can't entirely get away with this as an excuse. The company is bullish about the smaller format "mini supermarkets" it has rolled out, and (as the smallest of the big four) is looking at areas where it is poorly represented to expand into, which is sensible.

But at the same time, the competition has also been working harder (just consider the £350m Tesco has pumped into its Clubcard loyalty scheme since May), and there is a risk of drift while the company is in a transition phase. An impression of bunker mentality from its representatives yesterday was a dangerous sign.

The yield, at about 3 per cent, is nothing to write home about, but at about 13 times next year's earnings, the shares are inexpensive when compared to Tesco and Sainsbury, which trade at 14 times and above.

Given the uncertainty, we rate Morrison a speculative buy, not least because the shares will be choppy as speculation over the succession mounts and names are linked to the job (the rumour mill has already started). But those with a strong stomach may be rewarded if they tuck in.



Mitie

Our view: Hold

Share price: 235p (-1.3p)

We have been backers of Mitie, the outsourcing maintenance group, for quite some time. And on the whole, with the share price up by nearly 40 per cent in the last year or so, the group has done us proud.

The company certainly thinks it will continue to perform after announcing yesterday that first-half profits had jumped by 12.5 per cent, adding that it is confident of hitting full-year targets. Indeed, there has not been much wavering from this position for some time, with chief executive Ruby McGregor-Smith saying yesterday that Mitie is "very well placed for the future" and that "the next 12 months will provide considerable opportunities for Mitie to expand its long-term order book".

Investors may be concerned that while the share price has made gains in recent months, it has still lagged the market and the sector. But that is a good thing, say watchers at Panmure Gordon, who argue that "these are a good set of results that should be the catalyst to get the share price moving up". The stock currently trades on a p/e of 12 times, putting Mitie shares at a discount to rivals like Serco and Capita. The dividend yield, at 3.2 per cent, is decent enough.

We are just a little worried that the wider market has had its fun with Mitie, and that regardless of the discount, other names are preferred. We would hold fire to see if investors regain their appetite. Hold.

Armour Group

Our view: Buy

Share price: 15.75p (-1.75p)

The full-year numbers from Armour, the consumer electronics group, looked grim yesterday, with pre-tax profits down to £1.1m from £3.5m last year. But consider the battered state of high streets up and down the country, and that doesn't look so bad. In fact, profits were slightly ahead of expectations. Armour, which counts retailers like Tesco and DSGi as customers, also reported a reduction in borrowing (net debt was at £4.9m, compared to £8.9m last year).

Armour also has new distribution deals and has expanded into the small office/home office furniture market. These developments position it well as a recovery takes hold.

The shares also appear relatively inexpensive, standing as they do at little more than a third of the company's asset value. At around 14p, they are trading at around the same levels as mid-September 2008, when Lehman Brothers went under. We think that makes them undervalued. Buy.

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