Putting the company’s income attractions to one side, though, until recently it’s been difficult to see where exactly the upside could come from.
Farm-to-fork
The horsemeat scandal provides Morrisons with something of an opportunity, I believe. Here is an area where Morrisons, for once, is much further ahead of its rivals.
Let’s start with a simple quiz. Name Britain’s largest food manufacturer. And here’s the rub: thanks to its firm policy of farm-to-fork vertical integration, Britain’s largest food manufacturer is now… Morrisons. Formerly Britain’s second-largest food manufacturer, Morrisons is now top dog.
That’s right. The company owns 18 food manufacturing plants, employing 7,000 people. And that employment figure, I’d stress, excludes the people employed in Morrisons’ in-store bakeries and so on. Other companies — such as Greencore Group plc, for instance — have more employees, but not as many located purely in the U.K.
Quite simply, Morrisons buys its meat straight from the farm, sends the animals to its own abattoirs, and butchers it directly in its own stores. Critically — and here’s where some of those food manufacturing plants come in — it also supplies its own food preparation sites with meat, in order to make its own pies, sausages, cooked meats and other products.
Vertical integration
Now, that’s a very different business model from that adopted by most of its competitors. And up until the last three weeks, Morrisons has been promoting this model by extolling the benefits to farmers, better quality control, less waste and better use of resources.
But with the horsemeat scandal now breaking over even giants such as Nestle — which must, I reckon, have thought that it must have been immune from the risk — fate has handed Morrisons a marketing card that its competitors can’t quickly deploy for themselves.
For with its farm-to-fork supply chain, Morrisons can be more assured than most that horsemeat isn’t entering its supply chain. The challenge ahead: persuading fastidious customers of upmarket outlets such as Waitrose and J Sainsbury that Morrisons should be their meat products purveyor of choice.
Upside
On a P/E that’s currently a fair bit below the market average, and with movement afoot in terms of the Blockbuster and Lakeland deals, I reckon that Morrisons has probably more upside than downside. Factor in a boost from the horsemeat scandal — assuming the business has the marketing nous to leverage it — and that upside could be considerable.
Heck, even if Morrison’s were simply to reach the FTSE 100’s average P/E, that still implies a 30% uplift on today’s share price.
The article How The Horsemeat Scandal Could Benefit Wm. Morrison Supermarkets originally appeared on Fool.com and is written by Malcolm Wheatley.
Malcolm owns shares in Tesco and J. Sainsbury, but not in any other companies mentioned here. The Motley Fool owns shares in Tesco.
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