Shoppers’ heads are spinning these days with basket comparisons, price promises, card points and all the rest. Is it any easier for investors shopping for supermarket shares?
Today, I’m looking for a value-stock winner from the three big FTSE 100 supermarkets: Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), J Sainsbury (LSE: SBRY) and Wm Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US).
Let’s start with some fundamental data and key valuation measures.
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| Tesco | Sainsbury | Morrisons | |
|---|---|---|---|
| Share price | 369.1p | 398.0p | 286.5p |
| Forecast earnings per share | 30.74p | 30.39p | 25.31p |
| Forecast cash flow per share | 49.83p | 59.53p | 44.06p |
| Forecast book value per share | 220.34p | 315.80p | 234.40p |
| Forecast dividend per share | 14.76p | 17.52p | 13.09p |
| Price/earnings | 12.0 | 13.1 | 11.3 |
| Price/cash flow | 7.4 | 6.7 | 6.5 |
| Price/book | 1.7 | 1.3 | 1.2 |
| Dividend yield | 4.0% | 4.4% | 4.6% |
Source: Morningstar
Earnings
The forward price-to-earnings (P/E) ratios of all three companies tell us the supermarket sector is out of favour with investors. Even Sainsbury, the most expensive of the trio on a P/E of 13.1, is several clicks below the FTSE 100 average. Morrisons takes the value crown for earnings with a P/E of 11.3.
Cash flow
If you don’t trust accounting earnings, and have more faith in hard cash flow, Morrisons again leads the pack for value. Morrisons is trading on a price/cash flow (P/CF) ratio of 6.5, just ahead of Sainsbury’s 6.7, while Tesco is significantly pricier than its rivals on a P/CF rating of 7.4.
Assets
Morrisons comes up trumps again on the assets rating of price/book (P/B). Again, Morrisons shades Sainsbury — with a P/B of 1.2 versus the latter’s 1.3. And again, Tesco is a jump more expensive than its rivals on a P/B of 1.7.
Dividend
It’s a clean sweep for Morrison. The prospective dividend yield of 4.6% is superior to both its brethren, and 1.5% ahead of the FTSE 100 average.
Contrarian
Clearly, Morrisons is the contrarian bet within the supermarket sector. Going against the flow, by being the investing equivalent of an aisle salmon, can pay handsome rewards.
Critics of Morrisons bemoan its laggard status in online and convenience stores. But there’s another side to that coin: plenty of low-hanging fruit to fuel Morrisons’ growth.
Of course, with the whole sector out of favour, there’s an argument for investors to hedge their bets by spreading an investment across all three companies. I think there’s a good deal of merit to that argument.
