Two of our supermarket giants are perhaps not too far apart in their customer offerings, but which of the two is in a better recovery shape?
Sainsbury on the mend
Forecasts suggest earnings per share at J Sainsbury (LSE: SBRY) will fall by 12% in the year ending March 2017, following two previous years of decline, but the City’s analysts seem to think they’ll flatten out the following year… and might we see a return to EPS growth the year after?
Today’s first-half update saw total retail sales fall by 0.4% with like-for-like sales down 1.1% (both excluding fuel), with the LFL fall blamed on food price deflation — even the more more upmarket Sainsbury can’t avoid the pressure from cut-price masters Lidl and Aldi. But that actually doesn’t seem too bad a fall to me, and I can see Sainsbury’s customer base being a little more resistant to the lure of rock-bottom prices than the average Tesco shopper, so those calling a turnaround from March 2018 could be on the money.
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The other big unknown for Sainsbury is how well its newly-acquired Argos arm will perform. The acquisition of owner Home Retail Group was only completed on 2 September, so it’s early days yet, but in its second quarter to 27 August Argos saw total sales grow 3% and like-for-like sales rise by 2.3%.
That suggests a promising future if Sainsbury gets the integration right, and with the company already having 15 in-store Argos Digital outlets in place and planning another 200 by the end of the year, I’m reservedly optimistic.
Awakening giant
Tesco (LSE: TSCO) seems to be approximately two years ahead of Sainsbury, both in the pain and the gain stakes — the earnings slump started two years earlier and the end of it is expected to happen two years earlier as well. In fact, there’s a 140% rise in EPS forecast for the year to February 2017, though the mooted 6.7p per share would still be way below pre-crash levels of around 40p.
That sounds good, but it would still put the shares on a P/E of 27 at today’s 179p price, falling only as far as 19.4 if the further 38% EPS rise predicted for 2018 comes to pass. On top of that, we’re only looking at reinstated dividends yielding 0.2% this year and 0.5% next if expectations prove accurate.
But on the growth front, those EPS rises would suggest PEG values of 0.2 and 0.5 for this year and next (with 0.7 and lower considered a good growth indicator — if it’s sustainable in the longer term).
Which is best?
A first-quarter Tesco update in June showed only a modest 0.9% rise in like-for-like sales, though it’s a trend that continues from the previous quarter, and it’s genuinely looking like the worst is finally over. But having said that, I can’t help but see the highly valued shares as being priced for a return to Tesco’s former glory days of market-setting clout and high margins — and that’s surely not going to happen.
By contrast, Sainsbury shares at 250p apiece are on forward P/E multiples for this year and next of 12.5, and well-covered dividends are expected to yield around 4%. By traditional measures, that looks good — P/E below the FTSE average and dividends better than average. If we really are getting past the bottom, Sainsbury looks good value to me.
