Investment View: Tesco is still a cheap deal, Sainsbury's is in good shape but Morrisons lags behind

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.

Arts and Entertainment
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Arts and Entertainment
Exhibition at the Centre Pompidou in Metz - 23 May 2012
Is this how Mario Balotelli will cruise into Liverpool?
Ronahi Serhat, a PKK fighter, in the Qandil Mountains in Iraqi Kurdistan
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Poet’s corner: Philip Larkin at the venetian window of his home in 1958
booksOr caring, playful man who lived for others? A new book has the answer
Matthew McConaughey and his son Levi at the game between the Boston Red Sox and the Houston Astros at Fenway Park on August 17, 2014 in Boston, Massachusetts.
advertisingOscar-winner’s Lincoln deal is latest in a lucrative ad production line
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'
A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Quant Analyst - C++, Boost, Data Mining

£25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Service Desk Analyst- (Desktop Support, Help desk)

£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

Junior Quant Analyst (Machine Learning, SQL, Brokerage)

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

UNIX Application Support Analyst- Support, UNIX, London

£45000 - £55000 per annum: Harrington Starr: UNIX Application Support Analyst-...

Day In a Page

Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed