While supermarkets may well offer value in the products they sell, my title refers naturally to their shares rather than their goods. There are three big listed supermarket chains in the FTSE100 index -- being, in order of market cap, Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), Sainsbury's (LSE: SBRY) (NASDAQOTH: JSAIY.US) and Morrisons (LSE: MRW) -- but does size matter?
Tesco dwarfs the other two by weighing in at around £29bn at present, compared with the roughly £6bn each that Sainsbury and Morrison are worth. I've said often that, other things being more or less equal, I prefer a big-cap value play to a small one, but that distinction probably matters little here because they all qualify as big enough to be big caps, with Tesco's overwhelming superiority in this department therefore not of itself indicating value favouritism here.
They have all issued trading statements this week covering the Christmas period and following this there has been widespread comment and chatter on their relative merits, so I thought I'd toss my tin o' beans on to the topical discussion pile.
Remember that I'm coming at this from my relatively eccentric value view point, and that means I ignore a lot of the macro stuff that preoccupies the more traditional investor and commentator. Principally, I'm into the numbers and it hardly matters to me that they are supermarkets at all, really. Here are those numbers, specifically those in which I take a particular interest as a value investor.
Price-to-earnings (P/E) ratios and yields are 2013 forecasts. P/TB and gearing are from the last accounts, being the interims in each case. Gearing is net debt/net assets, not to net tangible assets. The latter would give higher gearing figures in each case, but the difference is negligible for Morrisons and Sainsbury due to their minor amounts of intangible assets. Tesco, though, has substantial intangibles, which would push their gearing figure based on net tangibles up to 57%.
In the case of Sainsbury, it notes that its properties were worth some £4.1bn over book value. I have adjusted for this in the above table for P/TB and gearing.
On the numbers alone, then, which offers the best value? No doubt in my mind, Sainsbury's is streets ahead. It's the lowest P/TB by a long way, and the highest yield by a short way. Add in the lowest gearing by some margin and it's a deal clincher. P/E is in between the other two, so even there it is better value than Tesco.
If you were a low P/E player, and that alone, Morrisons would win -- but that's not the way I'd play it. Forecast EPS, upon which P/E is based, is subject to a lot of uncertainty, and in any case, P/TB, gearing and yield trump P/E alone here.
Actually, Sainsbury's is pretty attractive to value players just on that P/TB as it is well under 1. I wrote an article on them in June 2012 when the price was 283p, drawing attention to this point. Some readers may recall a bid for the company at 600p back in 2007 and it has regularly been the target of other bid rumours over the years -- although, as usual, almost all bid rumours come to nothing.
I would never buy a share just on bid rumours, but bid potential comes with the territory of value investing anyway for free. That's because a lot of the same factors that attract value investors will also interest bidders, and Sainsbury's is the only asset play here.
A lot of the attention this week -- and before it, by those playing pointless guessing games -- has been focused upon these companies' Christmas trading statements, but I give little attention to those statements because they have almost no bearing upon their qualities as value shares. For what it's worth to some people, though, Tesco and Sainsbury's managed like-for-like sales growth of 1.7% and 0.9%, while Morrisons was back marker with a fall of 2.5%. The periods being measured are not identical, but you get the picture. While these figures may have had short-term effects on the companies' share prices and on appraisals by other types of share strategies, the value merits as I show them in my table above haven't changed appreciably from what they would have shown prior to the release of the statements this week.
Finally, I'd comment that I'm just comparing supermarkets here and not trawling the market for value shares and discovering these three. In practice I barely care about the business, as I've said -- and, when looking for value, I do trawl the whole market and see what falls into my net. I rarely concentrate my search on particular sectors. Nevertheless, Sainsbury's does appear to me not only the best value supermarket, but an attractive big-cap play in general as well.
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