With leading shares holding on to most of their early gains, supermarket group Morrisons is one company to buck the upward trend.
Its shares are down 2.5p at 196p after a downgrade from Goldman Sachs. In a fairly negative note on the sector, the bank said:
We continue to believe that the UK grocers face structural demand shifts which will mean permanently lower than historical returns in the absence of invested capital reductions. A small recent slowdown in growth rate of the discounters has come alongside a more aggressive profit rebasing than we forecast by Tesco. The average 15% share price rise year to date for the group suggests growth, long-term margin and capital expenditure assumptions which we do not believe are achievable.
On Morrisons in particular it said:
Morrisons has been the most proactive of the UK grocers in aggressively investing profitability in prices and services to reverse the trend in declining footfall. However, despite improvement, like for likes remain negative. Having cut dividend guidance for 2016, we believe new chief executive David Potts has more capital flexibility and will use this to invest in the operations of the core store business to further drive store sales. This is consistent with comments from the chairman that driving positive volumes is essential to long-term profitability recovery.
While we forecast this strategy will ultimately lead to improvement in like for like growth, additional investments in price and/or in-store service lead us to forecast lower margins in the nearer term. The net effect does not move our target price materially, but the stock has now reached our target price. We therefore downgrade Morrisons to neutral from buy on limited upside potential relative to our coverage. Since being added to the buy list on November 16, 2014, the shares are up 13.8% versus FTSE World Europe up 9%.
