According to research from Kantar Worldpanel, a firm that describes itself as the world leader in consumer knowledge and insights based on continuous consumer panels, Tesco (LSE: TSCO) returned to sales growth during the 12 weeks ending 1 February 2015.
Growth?Are you sure?
Yes, its true. For the first time since January 2014, Tesco increased its sales by 0.3% compared to this time last year. Thats not by much, but is better than the relentless slide in numbers weve become used to. Kantar Worldpanel arrives at its conclusions by combining market monitoring, advanced analytics and tailored market research solutions.
Such early warning of Tesco finding a sales bottom is good news. With luck, Tesco will confirm its green shoots of turnaround success with its next trading update. The tantalising question for us investors is whether now might be a good time to jump back into the sector if we havent taken a leap of faith already. Tesco is making the news today, but WM Morrison Supermarkets (LSE: MRW) share price looks perky on the read-across. Lets look at both firms along with J. Sainsbury (LSE: SBRY).
Is there value in the sector?
Investing in the supermarket sector still feels risky to me. Those once-dependable cash-generating firms that sold us our groceries were long prized for their defensive characteristics low in excitement, but reliable dividend deliverers backed by loyal, repeat-purchasing customers. Not any more. The business landscape is changing fast as discounting competitors re-write the rulebook.
Well-known chains such as Tesco, Morrisons and Sainsburys face a fight for survival as they air-run after finding the rug pulled from under their business models. Yes, they are all pitching into turnaround programmes, but I think it unlikely well see a return to past glories. New glories, maybe, but first they need to develop new business lines, methods, models and practices. To me, new growth seems likely to come from new things, so we are looking at jam-tomorrow, traditional growth propositions with the supermarkets rather than turnarounds based on existing, all be it streamlined, methods.
This is how the numbers look:
Year to early 2016 |
Recent share price |
Forward Price-to-earnings rating |
Forward dividend yield |
Forward price-to-sales ratio |
Tesco |
239p |
21 |
0.6% |
0.3 |
Morrison |
188p |
15 |
4.8% |
0.25 |
Sainsbury |
265p |
12 |
4% |
0.21 |
When it comes to turnarounds, the sales figures dont matter as much as the profit and cash flow figures. They do matter, but not as much in the first place. The table shows a lower price-to earnings multiple for J Sainsbury and thats a reflection on the firms better recent performance on profits Tesco and Morrison saw their profits slip further than Sainsbury.
Ignoring profits for a moment, Sainsbury looks the best value on the price-to-sales measure. If Sainsbury can drive its profits back up, and thats a big if, the value case could be compelling. However, thats only a cursory consideration of the immediate numbers and we should be careful to examine the whole picture before arriving at a view on these firms prospects.
Is Spring around the corner for the sector?
Kantar Wordpanel sounds a warning: Tesco lost UK market share, and discounters Aldi and Lidl, and high-end supermarket Waitrose, saw rises in sales and market share over the period under consideration. Nevertheless, Tescos efforts to sort itself out under new chief executive Dave Lewis attracted an additional 236,000 shoppers into its stores during the last 12 weeks, they say.
I cant help thinking thats small fry, though. We mustnt forget that Tesco shed 0.2% of its market share last year in what seems like a structural longer-term trend in the market that may continue to hamper the forward prospects of the London-listed supermarkets over the years ahead. Im not so sure that we see a new Spring as much as a fleeting beam of sunlight escaping the clouds. That said, Im open to being convinced otherwise by the supermarkets.
On balance, I’m still avoiding Tesco and the supermarket sector in favour of stronger investment propositions elsewhere. These five shares make good candidates for further research and remain robustly placed in their sectors.
The Motley Fool analysts identified these London-listed market leaders as enduring long-term investments. You can download this wealth-building report now, free from obligation. Click here.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.