Corporate Analysis: Morrisons Supermarket Company
Growth Pattern Choice
A company’s growth in earnings can be evaluated using the dividends or earnings per share, since they both come from the earnings of the firm. Precisely, dividends constitute 64% of the firm’s profits, and 58% of the free cash flow (“Read This before Buying Wm Morrison”). For Morrison, the dividends per share have experienced a 9.8% yearly growth on average, with the last three years reporting an 11% increase in the stock price (“Read This before Buying Wm Morrison”). According to analysts, the company’s earnings will grow even more in the future. The business ranks second according to Zack’s Rank, as a Buy stock, and graded A as a value stock (“Zacks Equity Research”). The past year also saw the company generating cash 0.55 times its total debt, and reported a debt to equity ratio of 0.28. Therefore, the company has been making good use of its debt to generate money, and still has an allowance to take on more debt in the future (“The Wm Morrison Supermarkets (LON: MRW”). This means that the company has a chance to grow its earnings even more in the future, and increase it dividends. The figures show that after paying the dividends, the company reinvests the remaining cash of 42% of the previous year’s free cash flow, and 36% of its profits, to generate 55% of the debt in earnings. Don't use plagiarised sources.Get your custom essay just from $11/page
Valuation
Valuation estimates a firm’s attractiveness as an investment opportunity. It estimates the business’ future cash flows and discounts them to their current value using the Discounted Cash Flow (DCF) method. Assuming that reducing free cash flow firms will minimize their reduction rate, and that increasing free cash flow firms will slow in their growth rate across this period, implies that growth has a tendency to decrease more in the earlier years compared to the later years (“Is There an Opportunity with Wm Morrison”). The DCF method rests on the notion that a currency will have less have in future than it does presently, necessitating the discounting of the aggregate of the future cash flows to estimate the present value. Notably, the estimates below for FCF rate of growth are according to Simply Wall Street. Therefore, the present value for a decade’s cash flow comes to £2.8 billion (“Is There an Opportunity with Wm Morrison”).
Fig 1. Ten year free cash flow estimate
Source: “Is there an opportunity with Wm Morrison Supermarkets PLC’s (LON:MRW) 38% Valuation?” Simply Wall Street, 20 Jan. 2020, simplywall.st/stocks/gb/consumer-retailing/lse-mrw/wm-morrison-supermarkets-shares/news/why-wm-morrison-supermarkets-plc-lonmrw-is-a-financially-healthy-company/. (Accessed 12 Mar. 2020).
The next stage is calculating the terminal value (TV), representing the cash flow of the organization beyond the initial stage. The Gordon formula for growth is employed in calculating the terminal value at a future yearly rate of growth equating the 0.5% ten year bond rate of the government (“Is There an Opportunity with Wm Morrison”). Terminal cash flows are then discounted to the present value at a 5.4% equity cost.
TV= {FCF2029 * (1+g)}/ (r-g) = £372 million * (1+0.5%) / 5.4% – 0.5% = £7.7 billion
Present value of terminal value (PVTV) = TV/ (1+r)10 = £7.7 billion/ (1+5.4%)10 = £4.6 billion
Total Equity value is the cash flow sum for the next decade plus the discounted TV to give an intrinsic value estimate of £7.3 billion (“Is There an Opportunity with Wm Morrison”). Lastly the equity value is divided by the number of shares outstanding. Relative to the present £1.9 share price, the firm seems undervalued at a 38% discount to the current trading of the stock price (“Is There an Opportunity with Wm Morrison”). Notably, expected growth accounts for about 19.7% of this value (FCF = TEV – PVTV = £7.3 billion – £4.6 billion = £2.7 billion). The value is highly sensitive to changes in the different assumptions, therefore the figure is a rough estimate rather than a precise value.
Conclusively, WM Morrison is a thriving company as evidenced by the growth pattern, which indicate that the Supermarket can manage its debt effectively and raise its dividends. Equally, the valuation of MW Morris’ indicates that the business will have a high terminal value cash flow with a yearly growth rate of 0.5%. MW Morrison has a secure financial future.
Works Cited
“Is there an opportunity with Wm Morrison Supermarkets PLC’s (LON:MRW) 38% Valuation?” Simply Wall Street, 20 Jan. 2020, simplywall.st/stocks/gb/consumer-retailing/lse-mrw/wm-morrison-supermarkets-shares/news/why-wm-morrison-supermarkets-plc-lonmrw-is-a-financially-healthy-company/. (Accessed 12 Mar. 2020).
“Read This Before Buying Wm Morrison Supermarkets PLC (LON:MRW) For its Dividend” Simply Wall Street. 21 Aug. 2019, simplywall.st/stocks/gb/consumer-retailing/lse-mrw/wm-morrison-supermarkets-shares/news/why-wm-morrison-supermarkets-plc-lonmrw-is-a-financially-healthy-company/. (Accessed 12 Mar. 2020).
“Why Wm Morrison Supermarkets PLC (LON: MRW) is a Financially Healthy Company.” Simply Wall Street. 23 Feb. 2019, simplywall.st/stocks/gb/consumer-retailing/lse-mrw/wm-morrison-supermarkets-shares/news/why-wm-morrison-supermarkets-plc-lonmrw-is-a-financially-healthy-company/. (Accessed 12 Mar. 2020).
Zacks Equity Research. “Is Wm Morrison Sup (MRWSY) Stock Undervalued Right Now?” Zacks, www.zacks.com/stock/news/762243/is-wm-morrison-sup-mrwsy-stock-undervalued-right-now. (Accessed 12 Mar. 2020).