Morrisons has rallied after a recent spate of underperformance, after analysts said the fall in the supermarket group's shares had been overdone.
John Kershaw at Merrill Lynch - the company's joint broker - has issued a buy note on the business and raised his price target from 260p to 280p. He said:
"Morrisons's shares have significantly underperformed the sector across the last three months, down around 8% versus a sector up about 4%. In part, the shares have been a victim of a flight from quality defensives towards cyclical, but in part, investors have taken the recovery to be mostly done and priced in, for all trading has likely surpassed expectations.
"We believe the market is well aware of Morrisons's strong like for likes but is worried falling food inflation will hurt sector sales and profitability. After the summer heatwave boost we do expect industry sales to ebb but for trading up/better volumes to, in part, compensate.
"With Morrisons targeting growth from smaller supermarkets we assuage investor fears that this will undermine profit: it's early days for small stores but our analysis shows that the full-offer, conforming space, high sales densities and Morrisons's renowned cost efficiency should ensure profit densities comparable to the core.
"We believe that the margin story on Morrisons is very much intact and is likely to not only come quicker than the market expects but also to continue for longer as the group gains the confidence to accelerate growth and take out or dilute costs further. In addition, as a defensive name, the flight into cyclical stocks from the sector feels like it has mostly done, to our minds."
Analysts at Bernstein Research are less impressed than Merrill, with a market perform rating on the shares. But they still have a price target of 260p on the shares, compared to today's market price of 245p, up 4.75p. They said:
"Morrisons continues to deliver robust growth (boosted by store acquisitions), and as it has 'grown into' its PE multiple, in our view, its valuation has become more compelling. However, in the UK we still prefer the prospects at Tesco."
Despite worse than expected industrial and manufacturing production figures, the FTSE 100 remains in positive territory, up 37.12. points at 4232.03.
Miners continue to dominate the leading risers, with the prospect of takeover activity from Brazil's Vale outweighing concerns about continuing weakness in demand.
Kazakhmys has climbed 33.5p to 625p while Antofagasta has added 24.5p to 591p, while one potential target for Vale, Xstrata, is 23.4p higher at 629.4p.
