Investment View: Tesco is still a cheap deal, Sainsbury's is in good shape but Morrisons lags behind
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Friday 18 October 2013
Last week I looked at some potential Christmas crackers in the retail sector – stocks to invest in before the January round of trading statements shakes up the sector's prices. By which I mean share prices. But you can't consider the retail sector without taking a look at its super heavyweight division and by that I mean the big supermarket chains: Tesco, J Sainsbury and Morrisons.
The last time I ran the slide rule over these three was in May and I suggested that it might be time to buy into Tesco. At the time the shares stood at 376p and they're a shade off that now. In the interim they plummeted to a low of 325p only to bounce back. So it doesn't look to have been the cleverest of calls.
As for the other retailers, Sainsbury's is slightly ahead of the 382p I advised a hold at, while Morrisons (avoid) is also a little down on the 289p at which I said avoid. So Sainsbury's counts as a win, Tesco a loss, and Morrisons a win. And not all that much has changed.
So to Tesco. Recently I wrote a fairly derogatory commentary about its new Hudl, the terribly named budget tablet in which I suggested that it was something of a gimmick whose main aim would be to get people into Tesco stores.
However, this it might do. It's not pretty, but it's not even £120 if you've enough Clubcard vouchers (£60 worth will buy one). The reviews I've seen have suggested it works well for the price.
Will shoppers who don't generally use Tesco like what they find when they go to buy one? My last visit to a Tesco warehouse provided one answer: not much. It was big, empty and antiseptic. This super giant format is looking increasingly dated but perhaps this was one of the stores yet to benefit from the group's investment programme. Which appears to be bearing some fruit, if the last set of results were anything to go, or to buy, by.
The performance of the European business grabbed some negative headlines when the last numbers were released. It's not doing well while the overall profit figure was a smidgen below forecasts and didn't look at all pretty. But remember that the UK is still the biggest part of the business and the UK numbers showed some sign of progress.
Sales were flat, meaning the bleeding has been stemmed, and the trading profit was up a bit. If that continues Tesco would start to look cheap at just 11.5 times next year's forecast earnings with a stable prospective yield of over 4 per cent.
I'm still cautious but perhaps my views are coloured by rotten personal experiences. The company's reboot appears to be bearing fruit. So I'm just about willing to say, keep buying, because the shares look cheap.
Tesco isn't being helped by the strength of Sainsbury's, which shows no signs of slowing down. The last set of results were good and it's planning a "dark" store to service its growing online business and keep up with demand. On the downside the expansion of bigger stores has some analysts a shade concerned. The other, real, danger for Sainsbury's, however, is intangible. It is hubris, the root cause of the fact that it is still only the number three supermarket group in Britain. It is the same thing that left Tesco in a mess.
I would hope Justin King, the chief executive who has been elevated in some quarters to godlike status, understands this.
Sainsbury's trades on 12.3 times this year's forecast earnings, implying a yield of 4.5 per cent. Having backed Sainsbury's for a long while it is almost looking like time to be taking some profits. But the business feels to be in too good a shape to do that. And even though it trades at a slight premium to Tesco, it deserves to given where these two businesses are. The shares are fair value, with an excellent and stable yield. There's no strong reason to come out, but there's no big driver to buy in. So keep holding.
So to Morrisons. The shares aren't far off Tesco's in terms of earnings multiple (11.2 times). A smaller operation – and Morrisons is much smaller – ought to be fleeter and snapping at its rivals' heels. But Morrisons hasn't looked like it has had the ability to do this since losing Marc Bolland to M&S. The broker Charles Stanley points out that its like-for-like sales performance continues to lag the wider industry, "reflecting a lack of exposure to the faster-growth online grocery and convenience store segments".
Action is being taken. However, it's going to take time. The best hope for Morrisons is that its rivals slip up over Christmas, but its shares are not cheap enough to make me want to take a punt on management's turnaround plan. Not at a time when Aldi is showing the lot of them how it should be done. If only the German chain's British operations were listed here.
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