It is hard to know how much weight to attach to an apparent slowdown in the pace of improvement at Wm Morrison in the second quarter of its financial year. The three months to July 31 was, as the company points out, the seventh consecutive quarter of like-for-like sales growth and suggests that the “fix, build and grow” strategy put in place by David Potts, the chief executive, after he took on the role in March 2015 is continuing to bring benefits.
On other measures — cash generation, the reduction of debt and the disposal of unwanted properties — Morrisons is ahead. Yet the rates of growth in like-for-like sales and those within the core retail business, the rise in customers and increase in the amounts they put in their baskets — all key metrics — were down.
Meanwhile, there are signs from the trade that Wm Morrison may still be losing market share, probably to the usual suspects, Aldi and Lidl, the low-cost German retailers.
None of this probably matters much. Growth is growth, by whatever measure. There are clear competitive pressures building up but operating margins were stable at 2.5 per cent. The rate of inflation on its products will start to slacken off as the financial year progresses, while Morrison’s policy of own production and its focus on food means that its sourcing is less exposed to the dollar and other currencies.
The detailed numbers suggest that the comparative period, the second quarter of the previous financial year, produced a very strong performance that was going to be hard to match. It is never useful to read too much into one quarter.
The figures are encouraging enough. Underlying pre-tax profit was ahead by 12.7 per cent to £177 million. On a reported level, it rose by 39.9 per cent to £200 million. The level of debt has fallen below £1 billion earlier than expected, down £262 million to £932 million. Cash generation remains strong — about£2.7 billion since the start of the 2014-2015 financial year.
Of the £1.1 billion disposals targeted from the sale of unwanted stores and those in development, £986 million has been achieved. No new ones will be opened in the current financial year and “a handful” in the next, with a couple of sites identified in areas where Morrisons is not represented.
None of the above should impact on current-year forecasts but the shares were off 12½p at 232½p. This is in part a reaction to the price rise since last summer, when it first become apparent that the improvements brought in by Mr Potts were gaining traction. There is no doubt, though, that the second quarter performance was seen by some analysts as disappointing.
The non-core operations, online and in particular wholesaling, have been identified as one of the routes to growth. Morrison’s production of food plays well to this venture. There is a contract in place to supply Amazon and since the end of the half year the company has been signed up by McColl’s, the convenience chain.
Morrisons is upping its expectations for that non-core business, so-called “incremental profits” of £14 million in the first half and £32 million so far set to rise to £75 million to £125 million, from an earlier target of £50 million to £100 million. It would be a surprise if the McColl’s contract were not followed by others, while it is hard to predict the fallout from any disposals forced on Tesco by the Competition and Markets Authority in return for clearance of the Booker deal.
The shares sell on approaching 20 times this year’s earnings, which does not reduce much over the next year. Given all the uncertainties over consumer confidence, that does not suggest much to go for.
MY ADVICE Avoid
WHY The shares look highly valued and an apparent second quarter slowdown in growth ahead of Christmas trading season is a disappointment
Ricardo
Shares in Ricardo have come back from almost £10 in January to below £7 last month, though they have since recovered slightly and added 21p to 775p on some decent annual numbers. It is not entirely clear why they fell, save that the market appears to have got this group wrong and there has been miscommunication.
Ricardo is a highly regarded engineer with strong positions in areas such as rail infrastructure, energy and environmental consulting, helping mass-market car producers to design new models and engineering work for McLaren and Bugatti on their supercars. It has just delivered the 10,000th engine to McLaren and been signed to deliver a new transmission for Aston Martin.
The shares have tended in the past to trade on a high multiple. There has been some disruption to the passenger car market, representing about a third of revenues. In Europe, Brexit has meant some manufacturers taking longer than usual to take decisions. This is expensive for Ricardo, which then has expensive engineers not doing very much.
The US automotive business fell into a loss as the company has been losing business with the big Detroit manufacturers, which are either not producing as much because of Asian competition or are taking the design work in house. It is focusing more on electric or hybrid vehicles being designed on the West Coast.
Those disruptions to the automotive side meant full-year margins to June 30 slid from 11.3 per cent to 10.9 per cent. Revenues were ahead by 6 per cent to £352.1 million but underlying pre-tax profits were up by just 2 per cent to £38.3 million and, on a statutory level after some small one-offs, they were down by 2 per cent to £32.2 million.
The order intake has stabilised to more normal levels and both it and the order book are ahead — orders worth £60 million were received in July and August, strongly ahead of £46 million last time. That book stood at £248 milion at the year end, a healthy 7 per cent rise.
Ricardo grows by small infill acquisitions, with one serving the American defence industry finalised since the financial year’s end.
The shares sell on less than 13 times earnings, though the dividend yield is not much to write home about — Ricardo is not a stock to buy for income. Dave Shemmans, chief executive, says that his company likes change but dislikes uncertainty. The uncertainties in the automotive market appear to be over while the drive towards cleaner vehicles and tighter environmental standards looks like beneficial change. Given its position in those growth markets, the price looks like a strong buying signal.
MY ADVICE Buy
WHY The share price fall looks unwarranted
