Suffice to say, the UK supermarket sector has not been a particularly profitable industry over the last few years, with the financial crisis causing shoppers to become more price conscious and cause a price war among incumbents. As a result, supermarkets such as Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) have delivered miserable financial performance and have seen £billions wiped off their valuations.
However, in future, Sainsbury’s could prove to be a great investment. And, although three of its food and drug retail sector peers have performed better than it over the last five years, with Greggs (LSE: GRG) being up 108%, Ocado (LSE: OCDO) up 141% and Booker (LSE: BOK) rising by 238%, Sainsbury’s still appears to be the best buy of the four companies. Here’s why.
Valuation
With Sainsbury’s share price having fallen by 19% in the last five years, its shares now offer great value for money relative to its better performing sector peers. For example, Sainsbury’s trades on a price to earnings (P/E) ratio of just 10.4 which, while the FTSE 100 has a P/E ratio of 15.9, seems to represent excellent value for money and indicates that an upward rerating could take place over the medium term.
Sainsbury’s sector peers, though, do not offer such appealing value for money after their stunning share price growth of the last five years. For example, Greggs trades on a P/E ratio of 18.7, while Ocado and Booker have P/E ratios of 136.8 and 21.7 respectively. This shows that, while they may enjoy significantly better investor sentiment than Sainsbury’s at the present time, their future share price performance may not be as strong as it has been in recent years.
A Changing Economic Outlook
As mentioned, part of the reason for Sainsbury’s demise and Greggs’ success is that, in recent years, people have become more price conscious in all aspects of their financial life. And, with Greggs focusing on a budget offering, it has been highly successful in tapping into this change in culture.
However, looking ahead, the UK economy is on an upward trend and, with disposable incomes rising faster than inflation, people may focus less on price and more on quality moving forward, which could hurt Greggs. Furthermore, with Greggs having failed with its higher price point brand, Greggs Moment, its ability to react to higher disposable incomes may prove somewhat limited.
Sainsbury’s on the other hand, is focusing less on price and more on customer service and quality products. With the UK economy going from strength to strength, Sainsbury’s could be well positioned to take advantage of changes to the mind-set of UK shoppers and, as such, may have a more appealing longer term outlook than Greggs at the present time.
Insufficient Growth
Although Ocado and Booker are expected to grow their bottom lines at a brisk pace over the next two years, their current share prices appear to fully reflect this. So, while Ocado’s bottom line is forecast to be 26% higher next year as online grocery shopping continues to see strong growth and Booker’s net profit is due to be 11% greater than in the current year, their price to earnings growth (PEG) ratios of 4.1 and 1.8 respectively do not indicate growth at a reasonable price. As such, they may fail to perform as well as the market is currently pricing in, thereby making Sainsbury’s a better option.
Looking Ahead
So, while Sainsbury’s does face a challenging period as the UK supermarket sector continues to be highly competitive, its generous margin of safety makes it a much better buy than sector peers Greggs, Ocado and Booker. Certainly, they have performed much better in recent years than Sainsbury’s but, with the future being much more important than the past, Sainsbury’s seems to be the best buy of the four right now.
