The food retailer’s vertical integration proves tasty

by John Marshall

Andrew Kasoulis of Credit Suisse has upgraded supermarket group Morrison to ‘outperform’ with a target price of 340p. Kasoulis believes that the fact that the group is the only vertically-integrated food retailer provides the scope to improve margins.

Some 13% of Morrison’s turnover is generated from its own meat, fruit and veg operations. They contribute over 35% of group profits and enjoy better margins than the retail business. As Morrison grows they will enjoy further economies of scale and should therefore improve their margins further.

The last TNS data indicated that Morrison’s sales were growing at 9.6%, despite the virtual absence of promotions/price cuts. The company could crank up promotions over the next few months. More importantly the investment in the ‘Refresh’ campaign should be completed by July. Morrison has a smaller own-label offering than others. Increasing this should help margins.

The shares are selling on a PE of 16.6 falling to 13.4, and then 12.1.

The writer holds shares in this company