Better buy: Tesco plc vs Biffa plc
Waste management firm Biffa(LSE: BIFF) was warmly welcomed back to the stock market last year in a re-listing at 180p a share after a number of years in the hands of private equity. Its shares are currently trading at 257p -- up 2.7% on yesterday's close -- after it released half-year results this morning.
Chief executive Ian Wakelin said: "We are pleased to have achieved a strong performance in the first half of this year, during which we have continued to deliver on our acquisitive and organic growth strategy."
Two defensive businesses
Biffa is a FTSE SmallCap firm, valued at £642m -- dwarfed by £16bn cap FTSE 100 giant Tesco(LSE: TSCO) -- but just as Tesco is the UK's top supermarket, Biffa is the country's leading fully integrated waste management specialist. Both have benefits of scale in their respective markets and both are relatively 'defensive' businesses. Even in tough economic times, people still need to eat and still create waste that needs to be recycled or disposed of.
Of course, there are also differences. The grocery market is in a period of radical change, competition has become intense and Tesco's revenue and margins have suffered. However, after half a decade in the doldrums, the company's beginning to make progress under impressive chief executive Dave Lewis, who set a target of building its operating profit margin back to 3.5%-4% by 2020.
Meanwhile, as today's results show, Biffa's business is thriving. The company reported a 7.8% rise in net revenue (that's revenue excluding landfill tax) and a 9.3% rise in underlying operating profit at a margin that nudged up to 8.1% from 8%.
Turning to the valuations of the two companies, the table below shows price-to-earnings (P/E) ratios and dividend yields for their current financial years (which and February/March) and the following two years.
|2018 P/E||2019 P/E||2020 P/E||2018 yield||2019 yield||2020 yield|
As you can see, Biffa has a cheaper P/E than Tesco and I view the waste managment firm's valuation as attractive, as there is good momentum in its business. Furthermore, in addition to organic growth, it's looking at a healthy pipeline of acquisitions, as it uses its scale and presence to consolidate a fragmented marketplace. It has a decent dividend yield and future payout prospects, considering the board's current policy is to pay out only 35% of earnings, as it pursues its growth strategy.
Meanwhile, Tesco's higher P/E suggests the market is pricing it for Dave Lewis to complete the turnaround of the business and for the £3.7bn acquisition of wholesaler Booker (which received provisional unconditional clearance from the competition watchdog last week), to prove a successful move.
Mr Lewis has done a fine job to date and I believe Booker may well prove a shrewd acquisition, not least because most of the UK's largest wholesalers have been screaming blue murder about it. On this basis, if I owned Tesco shares, I think I'd be inclined to hold on to them, while Booker's more attractive earnings valuation leads me to rate this stock a 'buy'.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Booker. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.