Why I'm holding onto Wm Morrison Supermarkets plc after 4.7% sales growth

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Morrisons supermarket store

Shares of Wm Morrison Supermarkets (LSE: MRW) rose by more than 4% on Tuesday morning, when the supermarket upgraded its full-year profit guidance after a strong Christmas.

The Bradford-based group said that like-for-like sales rose by 2.9% during the nine weeks to 1 January. Analysts were forecasting LFL sales growth of just 1.1%. Morrison's total sales, including fuel, rose by 4.7% over the same period.

The company says that underlying pre-tax profit is now expected to be £330m-£340m, ahead of consensus forecasts of £326m.

Is Morrison still a buy?

A strong Christmas means that boss David Potts has now delivered five consecutive quarters of like-for-like sales growth. Mr Potts has also been able to free up significant amounts of cash by improving stock control, and introducing a new automated ordering system.

This decisive turnaround has driven the shares up by 62% over the last year. But if you're considering an investment, it's worth noting that the stock now trades on a 2017 forecast P/E of 23, with a yield of just 2.2%.

Morrisons no longer looks as cheap as it did a year ago. Further gains may be harder to come buy. Consensus forecasts for the 2017/18 financial year put the supermarket on a forecast P/E of 21, with a prospective yield of 2.4%.

The group's strong cash flow and freehold property portfolio remain attractive to me, but I'm not sure if the shares are cheap enough to buy. At 245p, I rate this stock as a solid hold.

Festive cheer boosts sales

Morrisons singled out Beer, Wine & Spirits as one of its top performing departments over Christmas. Another firm that benefitted from festive tipple sales was Majestic Wine (LSE: WINE). Majestic's share price rose by more than 3% this morning, after the group said that underlying sales rose by 12.4% over the Christmas period, compared to last year.

However, the group continues to face significant competition on price from supermarkets. Majestic's gross margin fell by 1% during the festive period, as the firm was forced to cut prices to boost sales.

Profits are still expected to be in line with expectations, but chief executive Rowan Gormley said that the group needs to "retain flexibility to compete in a competitive market". I read this as suggesting that further price cuts may be needed in 2017.

A recovery play?

Majestic reported a loss during the first half of the year, and is battling to hit full-year profit forecasts of £10.8m, or 11.9p per share. This is 38% lower than last year's adjusted earnings of 19.2p per share, highlighting the scale of the challenge facing the group.

Consensus forecasts suggest that 2017/18 will be a much better year. Adjusted earnings are expected to rise by 45% to 17.3p per share, putting the stock on a forecast P/E of about 19.

However, at 3,38p, I believe a reasonable recovery is already priced into the stock. The group seems likely to remain under significant pressure from the supermarkets, and the current dividend is a fraction of the pre-2015 payout.

For me, these shares aren't cheap enough to buy, so I'll be shopping elsewhere.

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Roland Head owns shares of Wm Morrison Supermarkets. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.