Barrons : U.K. Grocer Morrisons Is a Smart Investment for the Coronavirus Era

U.K. Grocer Morrisons Is a Smart Investment for the Coronavirus Era

Like most of Britain’s big grocers, Wm. Morrison Supermarkets is riding high, as supermarkets become defensive stocks with booming sales from a nation stockpiling.

While the FTSE 100 crashed 18% in the past four weeks through April 1, the United Kingdom’s fourth-biggest supermarket was up 0.2%. But there is more than booming sales that makes the firm a tempting bet for investors.

The company, known as Morrisons (ticker: MRW.UK), differentiates itself from its peers by having a vertical supply chain—it owns many of the farms and processing facilities that supply its food.

This is key at a time when product sourcing is an issue because of the coronavirus pandemic. In addition, the business fundamentals are strong—profits are up, and management is successfully turning the business around.

Morrisons also has a secret weapon—a wholesale business with powerful partners boosting revenues. It has teamed up with Amazon.com —users can buy almost the full range of items Morrisons offers—and has also done a deal with retailer McColl’s to supply its convenience stores with its own-label products.

While the stock fetches a low 12.4 times this year’s expected earnings, it is valued in line with its peers. James Grzinic, an analyst at broker Jefferies, has marked Morrisons a Buy and predicts that the share price, currently about 180 pence, could jump 36%, to 245 pence.

In a March 18 note Grzinic said, “The group should be able to deliver appreciable sales gains by further building sales densities in stores and by expanding its nascent wholesale activities.”

Morrisons has a market value of 4.1 billion pounds sterling, employs more than 95,000 workers, and serves up to 12 million customers each week. In March, it posted pretax profit of £435 million for the 52 weeks to Feb. 2, up from £303 million, on sales of £17.5 billion.
The company was started by William Morrison in 1899 as a market stall selling butter and eggs. It opened its first supermarket in 1961 and floated on the London Stock Exchange in 1967, joining the FTSE 100 in 2001.

It has grown to more than 494 supermarkets but had been a dog of the sector. Britain’s grocers, like their peers in the U.S., have faced fierce competition from discounters and a shift in shopping habits toward buying groceries online.

Morrisons was in a worse position than most because it was slow to embrace online grocery shopping. It also lacked a smaller convenience-store format, despite a dalliance in buying old Blockbuster retail sites that it later sold. The convenience stores were ditched because they were in the wrong locations.

In addition to the Amazon deal, which was recently extended, Morrisons now sells more products on Deliveroo. CEO David Potts has said that the deal with Amazon is for a “number of years rather than on a rolling basis,” and Morrisons will look for opportunities “to innovate and improve the shopping experience.”

Some recent good news for the company: The U.K.’s top court on Wednesday ruled that Morrisons isn’t responsible for a 2014 data breach by a disgruntled employee.

What’s interesting about the Amazon deal is that it has progressed beyond just a distribution agreement. This could have major earnings potential over the longer term, even though the details are sparse and Morrisons operates only in the U.K.

The stock is also a strong play in the short term because the company is benefiting from the fallout of the coronavirus, and the company’s business is helped by owning much of its supply chain.

That makes Morrisons’ stock an appetizing bet for investors.

Barrons : The American Epicenter

Andy Henderson landed his dream job as a Broadway photographer in late March, just months after he and his wife moved from Rockwall, Texas, a small city outside Dallas, to a tiny studio apartment in Harlem. Two days and one photo shoot later, it was over.

The coronavirus crisis had arrived in New York City, and Gov. Andrew Cuomo said that all nonessential businesses must close to combat the pandemic. The 24-year-old Henderson not only lost the Broadway job and another managing a photo studio, but his freelancing work also dried up. His wife, Kenzie, 23, lost her rehearsal-studio job.

“It all fell apart in a week. We lost all of our income. We’re not sure how we’re going to get the rent paid,” Henderson said. The couple rented a car and drove to family in Texas as they ride out the coronavirus. They’re hopeful they can return, but they’re not sure when and to what. “We finally got our dream, and we don’t want to let that go,” he said. “But we’re just not sure.”

In one month, New York City has become the epicenter of the novel coronavirus outbreak in the U.S. Responsible for nearly a 10th of overall U.S. economic output, the city of more than eight million is all but frozen, as the restaurants and shops that line its streets are shuttered. Cars and taxis are empty, and lights are out across Broadway. Even the New York Stock Exchange, a symbol of American financial might, has shut its trading floor.

What is happening in New York City’s five boroughs and suburbs is both informative for other metropolitan areas across the country bracing for the stealthily spreading virus and indicative of how the U.S. economy will fare through the widespread business shutdown and beyond.

It’s often underappreciated how concentrated the U.S. economy is in metropolitan areas, says Ryan Severino, chief economist at Jones Lang LaSalle. “You start adding New York City to L.A. and Chicago and other major cities, very quickly you get to a majority of the U.S. economy,” he says.

To that point, the American Enterprise Institute noted in December that the six biggest U.S. metro areas produced $5.1 trillion of economic output in 2018, or a quarter of total GDP, and together would have ranked as the third-largest economy in the world. Two dozen metro areas accounted for roughly half of America’s 2018 GDP.

While it is too soon to gauge the economic hit to New York City, its experience so far shows there are risks to letting the contagion spread for too long before taking aggressive action. In some places, such as California and Texas, stay-at-home orders came earlier in their outbreaks and have been stricter.

What New York does have going for it, Severino says, is that the outbreak struck relatively early. While the economic toll will be acute, the city may emerge from it sooner than other parts of the country. But that depends on how well the shutdown works and lasts, and so far there’s no end in sight.

Cities with similar characteristics, even if to a lesser extent, can heed lessons from New York as the virus continues to spread, Severino says. “Dealing with it painfully upfront might help in the long run.”

While New York has a history of resiliency amid adversity—the recovery from the Sept. 11 terrorist attacks and the devastation of Hurricane Sandy among recent examples—there are elements of city life that make the coronavirus hit more brutal, both from a health and an economic perspective. There’s a population density and reliance on public transit unlike those of other American cities, and the wealth gap is greater in Manhattan than in any other urban area: The top 1% make 113 times as much as the bottom 99%, according to the Economic Policy Institute.

And there are limits to how far resolve can go during an extraordinary crisis with an uncertain timeline. It remains to be seen how many businesses survive the crisis and how many displaced workers can be absorbed by other industries. “There are always opportunities,” Severino said, but given the costs associated with retraining and potentially moving for work, “the question is, Do people have the ability to make change?”

Luca Di Pietro, the owner of five small neighborhood restaurants across New York City, let go of 95 employees—nearly all of his staff—when restaurants were ordered on March 16 to close regular service. He and his wife began raising donations for meals they are preparing and delivering to hospital workers. They’ve rehired 30 people and now serve 1,000 meals a day.

“This was out of necessity. We were bleeding, and it has kept the lights on and is a chance to survive,” Di Pietro said of his work-around. “But I wouldn’t be surprised if this goes on for months.” Already, he’s dealing with a shuttered bread vendor and with vegetable deliveries that have shrunk to twice a week. And with rents for his restaurants ranging from $13,000 to $35,000 a month, he said, “we don’t know what the world will look like after this.”

Job growth in New York City outpaced the nation’s in every year since the end of the last financial crisis through 2018, according to the most recent data from the state comptroller. Behind the boom: leisure and hospitality, the fastest-growing sector that accounted for about a fifth of all jobs added during that stretch. Those jobs, usually low-paying, were hit hardest and fastest by the coronavirus ambush, but the pain is quickly spreading.

More than 10 million Americans have been laid off in recent weeks, and doesn’t include the many who still can’t file for benefits because of overwhelmed state offices. Henderson, the photographer, said it took him 96 calls to reach a person able to help after days of New York’s website crashing. It took a month for Gabi Donchez, a 28-year-old Brooklyn resident, to get an unemployment check after she lost her marketing job due to event cancellations that began in February.

Economists predict at least 20 million in coronavirus-related layoffs by the end of April, a figure that has no historical reference and will no doubt leave many Americans out of work well after the virus dissipates.

The federal government is trying to help, passing late last month a $2 trillion relief package of aid for business and workers, but the rollout has been chaotic. Some small-business owners say it’s been difficult to learn details of the Cares Act’s provisions, which include nearly $350 billion in two-year loans for businesses with fewer than 500 workers, and gain access to the funds.

Di Pietro, the restaurateur, says he’s been unable to get tax accountants or other professionals to advise on the Small Business Administration’s coronavirus-relief program. In the meantime, he adds, “I’d rather do the work than wait for government money that may or may not come.”

>>> Weekly Market Update

Weekly Market Update: Pandemic numbers climb, hitting March data hard

US equity markets resumed moving lower this week amid the ongoing coronavirus pandemic. Confirmed cases globally topped 1M, with a quarter of the numbers in the US alone. The situation remained extremely dire, particularly in NYC and parts of Europe as deaths continued to climb and health care systems cracked under the intense strain. US March payrolls shrunk by a staggering 701K jobs and that number likely didn’t incorporate the full impact of state government lockdowns that have been enforced since the survey week. Initial jobless claims jumped above 6.5M nearly doubling consensus estimates, marking the second straight week of record highs.

Crude futures surged some 45% off the lows late in the week after President Trump indicated the Saudis and Russians assured him that they would be willing to resume talks on further coordinated output cuts if the US was willing to participate in production cuts. Friday the President met with US oil executives at the White House and expectations were running high that early next week OPEC+ producers will be able to reach an agreement to cut roughly 10M bpd of output going forward. Friday also saw the US government launch the Paycheck Protection Program (PPP) under the recently passed Cares Act. Treasury Secretary Mnuchin indicated that over $1.8B of relief loans for small businesses had been processed by the SBA by the afternoon of the first day. For the week, the S&P fell 2.1%, the DJIA lost 2.7%, and the Nasdaq declined 1.7%.

In corporate news this week, Xerox ended its hostile takeover bid for HP, blaming the coronavirus turmoil. Carnival Corp launched $6B in debt and stock sales in an effort to weather the virus storm over the next 12 months. Gap, Guess, and Urban Outfitters joined other retailers in extending store closures and furloughing employees. Automakers reported predictably terrible sales results for March, with GM Q1 sales down 7% and Ford down double digits. On Friday, it was reported that Walmart has seen a 20% jump in same store sales as American’s stocked their pantries to ride out the coronavirus pandemic. On the medical front, J&J announced it expects to initiate a Phase 1 study of its COVID-19 candidate by September, while Abbott said it has launched a point-of-care test that can detect novel coronavirus in as little as five minutes.


SUN 3/29
386.HK Reports FY19 (CNY) Net 57.5B v 61.6B y/y; Op 86.2B v 82.3B y/y; Rev 2.97T v 2.89T y/y

MON 3/30
*(DE) GERMANY MAR CPI SAXONY M/M: 0.1% V 0.5% PRIOR; Y/Y: 1.6% V 2.0% PRIOR
*(EU) EURO ZONE MAR ECONOMIC CONFIDENCE: 94.5 V 91.6E
JNJ Announces lead vaccine candidate for Covid-19; Expects to Initiate Phase 1 Human Clinical Studies of Vaccine Candidate at Latest by September 2020 and could be available for emergency use authorization in early 2021
*(DE) GERMANY MAR PRELIMINARY CPI M/M: 0.1% V 0.0%E; Y/Y: 1.4% V 1.3%E
AA Asset-backed 30-Day Commercial Paper rates at 2.05% v 1.95% prior; 90-day 1.81% v 1.61% prior - NY Fed
*(US) MAR DALLAS FED MANUFACTURING ACTIVITY INDEX: -70 V -10.0E
(US) White House reportedly plans to announce tomorrow a rollback from Obama-era auto fuel efficiency standards, allowing a billion tons more CO2 over lifetime of cars than under prior standards - NYT
*(CN) CHINA MAR MANUFACTURING PMI (GOVT OFFICIAL): 52.0 V 44.8E (returns to expansion after record low)

TUES 3/31
SNG.UK Confirms commencement of dosing in trial of SNG001 in COVID-19
*(DE) GERMANY MAR NET UNEMPLOYMENT CHANGE: +1.0K V +25.0KE; UNEMPLOYMENT CLAIMS RATE: 5.0% V 5.1%E (**Note: data only up to Mar 12 was included)
*(EU) EURO ZONE MAR ADVANCE CPI ESTIMATE Y/Y: 0.7% V 0.8%E; CPI CORE Y/Y: 1.0% V 1.1%E
*(US) MAR CONSUMER CONFIDENCE: 120.0 V 110.0E; Expectations index: 88.2 v 108.1 prior
(US) Dallas Fed March Texas Service Sector Outlook Survey: General Business Activity: -78.8 v 7.0 prior
(US) Pres Trump in tweet calls for $2T infrastructure bill

WEDS 4/1
*(US) MAR MARKIT FINAL MANUFACTURING PMI: 48.5 V 48.0E (lowest final reading since Aug 2009)
GM Reports Q1 deliveries 618.3K v 735.9K q/q; -7% y/y
(CN) Jia County (located in central China's Henan Province) institutes a partial lockdown after finding new coronavirus cases, article notes concerns in China about a second wave related to coronavirus cases - press
(US) Fed announces temporary change to supplementary leverage ratio rule to ease strains in the Treasury market resulting from the coronavirus and increase banking organizations’ ability to provide credit to households and businesses

THURS 4/2
WBA Reports Q2 $1.52 v $1.45e, Rev $35.8B v $35.3Be;
(ES) Spain Mar Net Unemployment Change: +302.3K v +30.0Ke (record increase)
*(US) WEEKLY INITIAL JOBLESS CLAIMS: 6.648M V 3.700ME (record high for 2nd week in a row); CONTINUING CLAIMS: 3.029M V 4.941ME
(RU) Russia Energy Min Novak: coronavirus is having an unprecedented effect on oil markets; an OPEC+ deal would not have any positive effects in current environment
(US) March ISM New York: 12.9 v 51.9 prior (all time low)
(US) Pres Trump: "Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!"
(SA) Saudi Arabia statement: calls for urgent OPEC+ meeting; wants to restore balance to oil market; OPEC+ should seek a fair deal - Saudi press
(US) Virus-related restrictions from China said to be disrupting US air cargo operations, affecting crews and flight scheduling; FedEx and UPS call on US govt to help protect the supply chain – press
(US) Virus-related restrictions from China said to be disrupting US air cargo operations, affecting crews and flight scheduling; FedEx and UPS call on US govt to help protect the supply chain – press

FRI
(US) MAR UNEMPLOYMENT RATE: 4.4% V 3.8%E
(US) MAR AVERAGE HOURLY EARNINGS M/M: 0.4% V 0.2%E; Y/Y: 3.1% V 3.0%E; AVERAGE WEEKLY HOURS: 34.2 V 34.2E
(RU) Russia Pres Putin: Want joint action in the Oil market; situation in the global energy market remains difficult, this undermines investment and threatens the workforce
(US) CDC reports total coronavirus cases in the US to 239,279 , +12.3% d/d (prior from 213,144, +14.5%); Total deaths 5,443 v 4,513 prior, 20.6% d/d v +25% prior
(US) Texas Railroad Commissioner Ryan Sitton (oil regulator): reiterates spoke with Russia energy minister, Texas would be willing to participate in a global coordinated effort to help energy market – CNBC
WMT US SSS +20% in past 4 weeks, up 30% in past 8 weeks - press

>>> US CLose Dow -1.69% S&P -1.51% Nasdaq -1.53% Russell -3.11%

Closing Market Summary

The stock market ended a down week on a lower note, though the S&P 500 (-1.5%) was able to remain above its low from Wednesday. The benchmark index surrendered 2.1% for the week. Small caps had a more difficult go, as the Russell 2000 (-3.1%) lost 7.1% for the week, stopping a bit above its March low.

Today's main storyline was the release of the Employment Situation report for March, which was expected to be very weak. The report showed that nonfarm payrolls decreased by 701,000 and that reading is likely to be revised lower next month, since the report was compiled in the first half of March before layoffs accelerated.

Stocks tried to make the best of a bad situation, pushing higher during the first few minutes of action, but selling pressure intensified shortly after the S&P 500 climbed above its high from yesterday. The market remained under pressure into the early afternoon with the S&P 500 settling near yesterday's afternoon low.

Ten out of eleven sectors ended in the red with six sectors logging wider losses than the broader market. Utilities (-3.6%), materials (-2.3%), and financials (-2.2%) were at the forefront of the selling while real estate (-0.8%) and consumer staples (+0.5%) outperformed.

Today's biggest laggard— the utilities sector—surrendered 7.1% for the week, finishing behind the remaining ten sectors.

The consumer discretionary sector (-1.5%) finished in-line with the broader market as gains in battered names like L Brands (LB 11.34, +1.19, +11.7%), Macy's (M 4.81, +0.36, +8.1%), Carnival (CCL 8.49, +0.52, +6.5%), and Under Armour (UAA 8.22, +0.43, +5.5%) masked sharp losses in shares of casino operators like MGM Resorts (MGM 10.58, -0.93, -8.1%) and Wynn Resorts (WYNN 48.50, -4.17, -7.9%).

Crude oil was able to build on yesterday's advance, climbing $3.16, or 12.6%, to $28.34/bbl. The energy component gained $6.69 or 30.9% for the week while the energy sector (-1.3%) climbed 5.4% since last Friday.

Longer-dated Treasuries finished near their best levels of the day, sending the 10-yr yield lower by four basis points to 0.59%.

The U.S. Dollar Index climbed 0.4% to 100.61, gaining 2.2% for the week.

Today's economic data included the Employment Situation report and ISM Non-Manufacturing Index for March:

  • March nonfarm payrolls declined by 701,000 (consensus -150,000) while February nonfarm payrolls were revised to 275,000 from 273,000. March private sector payrolls declined by 713,000 (consensus -250,000) while February private sector payrolls were revised to 242,000 from 228,000.
  • March unemployment rate was 4.4% (consensus 4.0%), versus 3.5% in February. Persons unemployed for 27 weeks or more accounted for 15.9% of the unemployed versus 19.2% in February. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 8.7%, versus 7.0% in February.
  • March average hourly earnings were up 0.4% (consensus +0.2%) after increasing 0.3% in February while average workweek decreased to 34.2 hours (consensus 34.0) from 34.4 hours in February.
    • The key takeaway from the report is that it still isn't adequately capturing the full extent of the weakness in the labor market. Things are even worse than the headlines here suggest, as yesterday's initial claims report made abundantly clear. Those filings are not embedded in today's report, which was formulated mostly on the basis of an employment survey conducted the week of March 12. In actuality, the unemployment rate is likely closer to 10.0% at this juncture
  • The ISM Non-Manufacturing Index for March checked in at 52.5% (consensus 43.0%) versus 57.3% in February. The dividing line between expansion and contraction is 50.0%.
    • The key takeaway from the report is that it's not as encouraging as it appears to be, having been bolstered by a nice pickup in the Supplier Deliveries Index (to 62.1% from 52.4%), which reflects slower deliveries due to the COVID-19 impact; moreover, it is understood that the services sector has been the hardest hit in the sudden economic stop and that this measure does not adequately capture the real-time change in business conditions.

Market participants will not receive any data on Monday.

  • Nasdaq Composite -17.8% YTD
  • S&P 500 -23.0% YTD
  • Dow Jones Industrial Average -26.2% YTD
  • Russell 2000 -37.0% YTD

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance:

  • MIC -23.4% (withdraws guidance and suspends dividend; provides strategic alternatives update), CHWY -2.9%, MNRO -1.3% (guides below consensus for MarQ revs and FY20 EPS)

Other news:

  • XAIR -5.4% (entered into $50 mln at-the-market equity offering sales agreement)
  • FLWS -3.1% (requested a reasonable delay in the closing of the previously announced acquisition of PersonalizationMall.com) MMM -2.5% (President Trump tweets that he has invoked defense protection act to force 3M to build masks after "seeing what they were doing")
  • SYRS -2.4% (Steven Cohen discloses 5.1% passive stake)
  • WPX -2.3% (attributed to block trade)

Analyst comments:

  • REAL -2.2% (downgraded to Neutral from Buy at B. Riley FBR)
  • PVH -2.1% (downgraded to Sector Perform from Outperform at RBC Capital Mkts)
  • URI -1.4% (downgraded to Neutral from Outperform at Exane BNP Paribas)
  • MCY -1.3% (downgraded to Underperform from Mkt Perform at Raymond James)
  • SHAK -0.9% (downgraded to Neutral from Outperform at Credit Suisse)
  • RL -0.9% (downgraded to Sector Perform from Outperform at RBC Capital Mkts)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:

  • HIMX +4.6%, STZ +4.6%, PLAY +3.9% 

Other news:

  • FATE +21% (announces first patient for FT596; also announces global collaboration deal with JNJ unit)
  • TSLA +16.2% (provides Q1 production update)
  • SVRA +11.8% (exclusive lic/collaboration agreement with GRFS for Apulmiq)
  • EBS +9.9% (to partner with US govt for plasma-derived therapy for COVID-19 patients)
  • HUYA +9.5% (announces Tencent's (TCEHY) exercise of its option and changes to board composition)
  • MTL +4.8% (sales network Mechel Service is supplying steel rolls for construction of infectious disease hospitals designed to fight coronavirus all over Russia)
  • NP +4.7% (announces that the Vectorply acquisition has not been completed)
  • CAKE +2.6% (provides comp guidance)
  • DVAX +2.6% (withdraws FY20 guidance for HEPLISAV-B net product sales)
  • UPWK +2.6% (attributed to block trade)
  • CODI +2.2% (provides COVID update)
  • TEN +1.7% (provides business update regarding COVID-19)
  • SUN +1.4% (maintains quarterly dividend)

Analyst comments:

  • TWTR +4.3% (upgraded to Buy from Neutral at Goldman)
  • UAA +2.7% (upgraded to Neutral from Sell at B. Riley FBR)
  • XP +1.2% (upgraded to Buy from Neutral at Citigroup)