The supermarkets have put in a strong performance so far this year. The FTSE 100 has struggled to make any headway, but Tesco (LSE: TSCO), Sainsburys (LSE: SBRY) and Morrisons (LSE: MRW) have soared higher by 25%, 14% and 29%, respectively. Yetall three stocks remain well down from their all-time highs. Could they be on the cusp of a spectacular recovery?
Tesco
Tesco once had around 33% of the UK market, but its slice is now down to 28%, as low-price rivalsAldi and Lidl have made relentless progress. Itremains the super-heavyweight with nearest competitorSainsburys having just16.4% of the market. But willthe UKs number onesee its market share further eroded, or can it fight back and thrive once again?
In France, Carrefour was hit by competition earlier than Tesco, and its response looks the model for the UK firm. It broughtprices down, not to Aldi/Lidllevels, but enough to entice customers back with a balance of value, range and service. Its proved a successful strategy and the shares have made a big recovery over the past few years.
Tesco has been sowing similar seeds and there are signs of green shoots. The Welwyn Garden City firms annual results earlier this month showed improving trends across the board in the final quarter of last year. Analysts expect earnings to more than double this year, followed by a 35% increase next year, bringing a high price-to-earnings (P/E) ratio down to a reasonable 18. Its early days, but the shares could continue to march higher if a Carrefour-like recovery unfolds.
Sainsburys
Sainsburys was the last of the Footsie supermarkets to feel the effects of competition in the sector on its top and bottom lines. While analysts forecast strong earnings recoveries this year and next from both Tesco and Morrisons, City number crunchers expect Sainsburys to lag its rivals. A fall in earnings of 6% is pencilled-in for the financial year ending March 2017, with a meagre 2% rise the following year.
Sainsburys forecast P/E of 13.5 compares favourably with the valuations of Tesco and Morrisons. However, recovery at Tesco and Morrisons has taken longer than analysts initially expected, and it remains to be seen whether that will prove to be the case with Sainsburys. Theacquisition of Argos, if it goes through, adds additional uncertainty, and I see this as one to watch for the time being.
Morrisons
Morrisons is the smallest of the three, with a market share of 10.5% so youd expect itto be the weakling and to really struggle for profits in a competitive environment. However, the Bradford firm has advantages over its rivals. Ithas a strong freehold property base, so doesnt have anything like the rent bills of Tesco and Sainsburys. And it has a large manufacturing business, so its earning a margin both as a producer and a retailer.
Analysts are forecasting earnings growth of 44% this year, followed by 10% next year, putting Morrisons on a P/E of 17, compared with Tescos 18 and Sainsburys 13.5. As a general rule Im less keen on investing in a company thats making an acquisition than on a potentialbid target, and Morrisons appears a credible takeover target. However, its the forecast earnings recovery that appeals, with the potential of an offer for the company merely a bonus.
Making sensible risk/reward judgements can help enhance your returns from the stock market in the long run. And you can discover further simple steps towards boosting your wealth in the Motley Fool’s FREE guide 10 Steps To Making A Million In The Market.
The Motley Fool’s experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. There are no strings attached, simply click here for your free copy.
G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
