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Equity Report on Morisson’s

Morisson’s stock price is expected to go up in the future and present stockholders are advised to keep the holding to be able sell them later. Prospective investors are advised to proceed to buy from the company’s stock since expected price increase will definitely result to their advantage for higher profits or earnings. Expected increase in stock prices could result from profitable operation, and continuously solvent position of the company for the last five years.

Valuation conducted on the company’s stock also produced evidence of under valuation hence present stockholders are advised to hold their stock investment and may dispose them at some future time because prices are expected to increase. Since the intrinsic value exceeded currently quoted stock prices of Morrison, there is basis to conclude that the real price will come out which will cause the expected increase. The trend for the expected increase in price is also consistent with continued profitability and good capital structure of Morrison’s. PART I

Morrison’s share price from January 200t until now (March 17, 2009) compared with competitor Sainsbury and FTSE 100 index is as shown graphically in Figure 1 below: Legend: Dark Blue for Morisson’s, Light Blue for FTSE 100 Index and Yellow

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for Sainsbury Source: Telegraph (2009a): Significant news influencing the share price of Morison from January until now is about the fact the Morisson managed to have recorded profits despite the recession and managed to increase its full-year dividend. The company was also reported to add new space to its store.

This news could be seen in the increase of the stock price in March 12, 2009 as shown in the graph below. Figure 1A – Stock price graph for the last two weeks; Source Telegraph (2009b) PART II: Introduction Morisson, Inc. (or Morisson) operates under retail industry in the United Kingdom and has its stocks listed in the London Stock Exchange. (MSN, 2009; Morisson, 2009a). This paper aims to writer a professional equity analysis report based upon detailed strategy, accounting, financial and prospective analysis of Morisson’s, a FTSE 100 company.

For this subsection, the discussion is limited possible issues in main accounting policies, strategy adopted by the company and the possible effect of IFRS adoption. Complete attainment of the aims of this paper will be partly done by rest of the subsection up to the key recommendations and conclusions. The main accounting policies include revenue recognition where the company recognized the same when significant risks and rewards of ownership have been transferred to the buyer, that there is reasonable certainty of recovery of reconsideration and the amount of revenues, associated cost and possible return of goods cane estimated reliably.

The other accounting policy include also those of Property, plant and equipment which the company at loss less accumulated depreciation and accumulated impairment losses. Potential problem in accounting policies could include the way the company really make estimated since the same could be subject to error and will have an effect on the reliability of the financial statements. The company’s strategy using Porter’s five forces include that of adopting both cost leadership and differentiation. This based on the following information provided by the company.

The company needed to respond the higher cost of basic commodities due to rise of inflationary cost which will increase the bargaining power of buyers in the industry thus in avoiding to pass higher cost to customer, the company strive to operate at low cost. It differentiation strategy is making the company as UK’s food specialist for everyone” as the company emphasized a deep understanding of food. The company admits that there are no significant changes due to the adoption of IFRS in 2005 except for IFRS 7 on Financial Statements’ requirement for disclosures.

The company did not change underlying accounting rules and did not alter its accounting policies although there are differences in interpretations as a result of the IFRS adoption. The company considered the differences immaterial to its operations and therefore deemed irrelevant (Morisson, 2009a). PART III: Financial analysis This part seeks comment in the performance of the company using ratio and cash flow analysis. This will also calculate and comment on the overall profitability and sustainable growth rate for Morrison’s. This part will also link these rations to the strategy and relevant news pertaining to the company.

III. 1 Ratio and Cash Flow Analysis Liquidity ratio guides a company to know whether it is able to meet a company’s currently maturing obligations. It is usually determined by using the current ratio and the quick asset ratio. As applied now, the current ratios of Morisson averaged at 0. 17 while its quick asset ratios for same years averaged at 0. 45. Refer to Table A. Both ratios indicated fluctuating behaviours for the five years under review where both increase and decrease were recorded and both can be described to be very considering that both ratios did not reached 1.

0 to indicate that Morisson’s can match 1 sterling current asset to 1 sterling current liability. The results appear surprising considering that the company has generally high profitability. It could mean that the company’s profitable operation has not affected much the company’s still acceptable liquidity and that the risks of bankruptcy has become higher since non-payment of salaries of employees part of current obligations would push employees to stop working. Morisson’s liquidity is lower than industry average of 0.

97 (Reuters, 2009c) which makes it clear that company is indeed may be suffering some liquidity problem. The result of the analysis however would have to be linked with the capital structure of the company as discussed in the next part. To determine whether the company could still meet is obligation; its cash flow must be analyzed. Morisson’s financial statements however show that the company has still positive net cash balance per year for the last few years except in 2005. Please see Table A below.

In facts it cash from operation was providing enough cash for its fund requirements. Table A- Cash flow excerpts 3. 2 Profitability and Sustainable growth; Source MSN (2009) The performance of the company may be looked into in terms profitability and liquidity for the last five years in comparison with Sainsbury and the retail industry as a whole. To accomplish the same, there is need to present a summary of the ratios that are applicable as shown in Table 1 below: Table 1- Summary of Financial Ratios: Source: (Morisson’s, 2009)

The company’s revenue reflected a revenue increase of 5% for the past 4 years and this indicates positive development particularly in the latest year, which reflected 12%. The company’s strategy appears to have work well for the company despite the recent financial crisis. No wonder the company’s profitability was further maintained as in the past when there was no recession. This development indeed confirms the news event that the company is a winner in the recession (Wilson, 2009). The company’s returns on equity (ROEs) for the past five years are high with just annual average of 10%.

The comparative years would show that the rates were almost 11% in many of the years from 2005 through 2009 but it was only in 200t that Morisson was able to reflect a lower ROE of 9%, thus pulling the average for five years at 10%. Please refer to Table A. To have such a 10% annual average means that the company is generally profitable since the same could indicate a sustain level of profits where investors makes about 10 sterling for every 100 sterling investments. The company will definitely sound like a good investment option.

To compute return on equity, one needs the formula whereby net profit is divided by the total stockholders equity which means that profits is being related with how much was put it. The company’s operating margins may have a low average of 3% after the deducting the operating expenses from the gross margin of 9%, but the relatively high ROE is more important to investors and stockholders. Given also the low average net profit margin of 2%, the performance may still be very attractive from the point of view of the stockholders or shareholders who appeared also to be consistently provided with dividends.

Since the company’s return on assets, which averaged only 3% for the past five, may also show not so much operational efficiency on the part of management, it could mean that there is enough reason to keep the present management since increasing the efficiency could still result to more wealth for stockholders. It could also mean more areas for improvement. More relevantly, the low net profit margin is a proof of cost leadership as a generic strategy of the company. This was necessary to fight competition because of the financial crisis as customers look for low price products.

PART IV: Credit analysis: The company’s capital structure would show how strong and stable the company over the long-term. Since corporation are expected to exist for the long-term, its health can be measured in terms of determining the acceptable level of risk as company tries to recover over the long term whatever investment was or will be made. If liquidity assures the short-term while solvency assures the company’s long-term capacity to keep up it stability over the long term.

Two ratios to measure solvency includes debt equity ratio and debt asset ratio or debt ratio. Debt to equity ratio as computed by having the total debt of the company divided by its total equity, said solvency ratio basically guides investors that the company needs to have a long life to recover long-term investments, which takes years to produce the needed returns. The debt to equity ratios of Morisson averaged at 0. 88 for that past five years. Please refer to Table B below. The ratios are quite low since only in 2006 when the debt to equity ratio has exceeded 1.

0, which indicates the company’s investment from stockholders is adequately covering borrowings and therefore the company could be considered solvent. On the other hand, debt ratio uses total assets divided by the total assets. Morisson’s debt asset ratio also showed increased consistently from 2004 through 2007 and decreased in 2008. It must be noted that both debt to equity ratio and debt ratio would be better if the same are lower compared with other ratios. This must be so since the ratios measure risk and the lower the ratio, the lower risk.

The lower the risk the better is the expected returns of the investments. It can be noted that the changes in the debt to equity ratios showed slight improvement from 2006 through 2008 and then deteriorated a little 2009 with only a little improvement in 2006. However, the average was still below 0. 50 and the company’s solvency was almost maintained. The maintained condition in the company’s solvency could be attributed to the continued profitability of the company for the last fiver years starting in 2005 as noted earlier in the profitability analysis.

As an overall assessment however, the company may be considered as solvent but the company appears to sacrificing its liquidity position of Morisson may be still saving the short-term life of the company and which may have prevented the company from bankruptcy. Table B – Solvency ratios; Source MSN (2009) The good capital structure of the company is a welcome to investors since it assures investors of long-term health. In fact for the even for the year 2007 and 2008 alone, Morisson has effected a very big reduction of its debt although the company has much assets to cover its debts.

As of February 2008, the outstanding amount of debt was reduced from ? 772 million to ? 543 million. With the low debt level, the company has net assets of ? 4. 3 billion and ? 3. 9 billion for 2008 and 2007 respectively. The high profitability of the company as the main cause of the improvement and the lower level of capital investment than anticipated. It would also mean the company is shelving bigger capital investment as a reaction to what is happening in the economy.

At the same time, the strategy is making the company less risky to investors making its stock more attractive to invest with. An attempt to find debt rating for Morrison from S&P rating but the same was not available. One way to compute the debt rating of the Morisson is to compare it capital structure with the competitors and the industry. Compare with Sainsbury debt to equity ratio of 0. 54 and industry average of 0. 61, Morisson’s company may be inferred to be more risky although the company has it at below 1.

0. This could explain therefore the company’s desire the reduce its debt to equity ratio or maintain the same at below 1. 0 in 2008. PART V: V. 1 Forecasting Based on the strategy, accounting and financial analysis, the sales and earnings for Morisson’s over the 2-year horizon are ? 15,254. 40 million and ? 305. 088 million for the first year, 16,017. 12, and 320. 3424 for the second year respectively. The results were based on historical performance of the company for the past five years.

The forecasted level of revenues used the average increase for the past five years while the earnings used the average net profit margin for the past five years. See Appendix C. The forecasted EPS for the next two years are 0. 15 pounds and 0. 17 pounds for the years 2010 and 2011 respectively. See Appendix C. The results were based on historical performance of the company for the four years. The change from 2005 to 2006 was a big negative rate thus was disregarded. This researcher is pessimistic compared to the current consensus EPS forecast from Thomson of 17.

84 pounds (Reuters, 2009) because of the following. My basis are historical data and taking the average means that expected growth or change in EPS could not be more optimistic than the last four to five years because of the present recession experience not only in the UK but also around the world. My reasons therefore include those that would factor due to the assumed continuation of recession for the coming two years. V. 2 Valuation The current (trailing) price-earnings multiple for the Morisson’s is 15.

01 while its forward (1-year) price-earnings is not available based on Reuters (2009a). The company’s valuation using current price earnings ratio is 174. 12 pence per share and comparable multiples produce the range of value of 192. 61 pence in Sainsbury’s P/E is used or as low as 6. 61 pence per share if industry P/E is used. See summary below. It can be noted that the computed valuation is more than current stock price as quoted from stock exchange at 100 pence per share. It would seem therefore the stocks of the company are undervalued. See Appendix See Appendix A. V. 3 Recommendation

Based on the undervaluation, stockholders are advised to hold their stock investment since stock price could go up for the market to correct itself assuming the valuation computed would reflect the correct value of the stock. Outside investors may also be advised to buy shares from Morrison since they could expect to have higher prices of stock after sometime and this would mean increased wealth for them. VI. Conclusion It can be concluded that company’s current stock price of Morisson may be maintained at it present level because of continued profitability and generally acceptable solvency.

However, its low liquidity is alarming in terms of it current ratio and quick ratios. The deeper investigation in the company’s cash flow provides information that operating activities are still contributed positive cash flow to the business. However, what makes the company very attractive is its consistent payment of dividends of stockholders indicative of very liberal dividend policy as the possible expense of its liquidity rations This paper therefore recommends maintaining or holding ones’ present stockholding from Morisson and wait for the proper time to dispose the same.

For would-be investors in the company’s stock, they could be advised to buy from the company’s stock as they could be assured of regular dividends if the past experience would be used. Appendices Appendix A- Valuation; Sources: Reuters (2009) Appendix B – Forecasted EPS, Source MSN (2009) Appendix C- Forecasted Revenues and Earnings References: Morrison’s (2009) Annual Report for 2008, {www document} URL http://www. morrisons. co. uk/Corporate/Investors/Financial-Reports/, Accessed March 17, 2009 MSN (2009), Financial Statements, 2005 through 2009, {www document} URL http://moneycentral.

msn. com/investor/invsub/results/statemnt. aspx? Symbol=MRWSF, Accessed March 17, 2009 Reuters (2009a), Consensus EPS Trend, {www document} URL http://www. reuters. com/finance/stocks/estimates? symbol=MRWp. L, Accessed March 17, 2009 Reuters (2009b) Price Earnings Ratio, {www document} URL http://www. reuters. com/finance/stocks/overview? symbol=MRWp. L, Accessed March 17, 2009 Reuters (2009c) Ratios, {www document} URL http://www. reuters. com/finance/stocks/ratios? symbol=MRWp. L, Accessed March 17, 2009 Reuters (2009d) Sainsbury Financial Ratios, {www document} URL http://www.

reuters. com/finance/stocks/ratios? symbol=SBRY. L, Accessed March 17, 2009 Telegraph (2009), Stock Price graph with comparison, {www document} URL (2009a)http://shares. telegraph. co. uk/charts/? epic=MRW&period=MONTH3&type=2&compareTo=SBRY+AIM1+&submit=Draw, Accessed March 17, 2009 Wilson, Amy (2009), Morrison’s is recession winner as profits jump, {www document} URL http://www. telegraph. co. uk/finance/newsbysector/retailandconsumer/4977406/Morrisons-is-recession-winner-as-profits-jump. html, Accessed March 17, 2009

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