Morrisons (MRW) still has the weakest retail offer of its competitors and will need more time and money to win back shoppers, investment firm Bernstein has said.

However, analyst Bruno Monteyne has upgraded the stock from ‘underperform’ to ‘market-perform’ with a new target price of 170p, up from 140p, based on the strength of the retailer’s balance sheet and change of strategy being implemented by CEO David Potts and the new management team.

An analyst note in the form of an open letter to Potts, who has now been in the role for just more than six months, added that if Morrisons could come up with a “magic distinct formula” for its shops, then it could yet be a winner.

Morrisons’s strong balance sheet – stemming from the fact it owns more than 80% of its stores, minimising rent payments – give Potts more time than other struggling rivals to find its new identity, Monteyne said.

“In the past Morrisons’ lack of a credible retail offer, weak management capability and expectations of rapid margin recovery made it our conviction sell. The company missed margin expectations at H1, reset future expectations and management is changing for the better. Is that enough to see it as a great investment? No.”

He added: “There is still no credible retail offer and we think it will take more time and money to find the offer that resonates with consumers. However with the UK environment getting more benign for a while and apparently rapid cost-cutting, we can see positive catalysts for the stock in the next 12 months that will support the share price.”

The stock has plummeted in the past month from 176p to an 11-month low of 152.9p after a 47.2% collapse in first-half profits to £126m, a cut to profit forecast by HSBC and a ratings downgrade from Moody’s. Shares are currently trading at 155.5p (up 0.8% so far today).

Morrisons also offloaded its convenience portfolio to Mike Greene for £25m earlier this month and Potts outlined a six-point turnaround plan following the disappointing interim results.

Monteyne warned that despite the balance sheet strength, Morrisons was exposed in the event of a fresh price war breaking out because of the profitability of the stores. At the end of the first half underlying earnings before tax was 1.7%, while Sainsbury’s is at 2.5%, the retail analyst said. “Therefore, as of today, if it came to a further escalation, Sainsbury’s has more margin to invest in prices,” Monteyne added.

The note went on to tell Potts he would have to be “much more radical” on price or quality. “On price you are facing the toughest competitors: Aldi and Lidl on own label and Asda on branded. Asda won’t be asleep for much longer. You made some progress already, but so much more to do,” Monteyne said.

Retrenching and shrinking to a core estate seemed the correct thing to do, the note continued, and was a more sensible strategy than spending hundreds of millions of pounds on ‘strategic’ but “badly-thought-through initiatives” as occurred under former CEO Dalton Philips, the analyst added.

“Taking the foot off the gas on convenience and online is sensible; I don’t know if you really had to sell all those stores but at least it’s one less worry,” he said. “It’s early days but many of the moves we see, we applaud.”