James Moore: Take a tip from Warren Buffett and buy some Tesco shares
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 20 January 2012
The retail sector is one to approach with caution. Consumers have less money in their pockets, too much debt that needs paying off, and precious little confidence.
On the face of it, the supermarkets at least look more defensive than most. They tend to own their stores (so don't have rent to worry about), have manageable debt and their mainstay is not something consumers can do without.
But the big three UK-listed chains still face serious challenges. Yesterday Goldman Sachs downgraded the lot. The broker feels that their ongoing land grab will prove "value destructive" while competition for the hard-pressed consumer's pound is heating up. More price wars are on the way.
Not so defensive then?
Let's take Tesco first. Post-profit warning, its multiple has declined to 9.4 times forecast earnings for the year ending 29 February 2012, falling to 8.9 times for 2013 with a forecast yield nearing 5 per cent. The sector heavyweight has expanded rapidly overseas, but has dropped the ball at home. As such, it is going to spend several hundred million pounds tarting up its UK stores and hiring more staff in an attempt to make its customers feel loved. It might also care to spend a few quid on customer service training for the drivers who deliver its online offering. They could learn a thing or two from Ocado. It doesn't cost much to smile a bit.
Chief executive Philip Clarke's plans have received a vote of confidence from legendary US investor Warren Buffet, who has been buying shares. No wonder. Tesco is the cheapest of the big three on valuation grounds and has that overseas growth to offer. It is also not the sort of organisation to miss the fact that it has a hard lesson to learn.
Staff too have felt the pinch: they won't make the sort of returns under the share-save scheme they have become accustomed to. They can take a £275 cash bonus. Or they can stick with the shares. We'd take our cue from Mr Buffett. Buy.
J Sainsbury chief executive Justin King said he saw "more of the same" on the horizon for 2012. If so, it won't be all bad news for the company's shareholders: Sainsbury's won the battle for Christmas sales, posting a modest rise. In addition to the aforementioned land grab, it has expanded existing outlets and added some zip to its convenience stores, online and non-food offerings. (Supermarket non-food offerings might hold up better than expected – they are perceived as being cheap.)
Sainsbury's has more leasehold stores than rivals, which I don't like, but also a more middle-class customer base, although Mr King gets irritated if you suggest this to him – Sainsbury's is for everyone.
Sainsbury's trades on 10.5 times forecasts for the year to 31 March, falling to 9.7 times for 2013 and has the best yield of the lot at 5.6 per cent rising to 5.9 per cent. For low-risk, income investors there may be safer bets (as I suggested this week), but that's still not to be sniffed at. The Qataris also remain on the scene, and their continued interest should provide a floor for the shares. Hold.
Trading on 11.5 times the year to 31 January, falling to 10.1 times in 2013 forecasts, while yielding 3.7 per cent rising to 4.3 per cent, Morrisons is not only the smallest of the big three, it is also the most expensive (at least in terms of the shares). The most reliant on food, it has only just started building convenience stores and still has a lot of growth to shoot for. However, it arguably has less firepower to compete in the event of a really nasty price war and doesn't have Sainsbury's saving grace of more upscale consumers (who might pay more).
This column has been a backer of Morrisons, but at these levels the chain, which endured a disappointing Christmas, is our least-favoured of the three. Take profits.
- 1 What marriage would look like if we actually followed the Bible
- 3 The Chinese city where men have 'three girlfriends because there are so many women'
- 4 'Heartbreaking' Syria orphan photo wasn't taken in Syria and not of orphan
- 5 Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition
Britain to take more refugees as Cameron bows to pressure after more than 250,000 back our campaign
Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
Make your voice heard: Sign The Independent's petition to welcome refugees
iJobs Money & Business
£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...
£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...
£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...
£14000 - £16000 per annum: Recruitment Genius: This company was established in...