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Why Tesco PLC Beats J Sainsbury plc And Wm. Morrison Supermarkets plc

In my examinations of the FTSE 100 sectors, last time I took a look at three companies producing food and domestic consumables, and I picked Reckitt Benckiser as my favourite — albeit not one I’d rush out to buy.

Today I’m taking a look at the three big FTSE 100 supermarkets — Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) and Wm Morrison Supermarkets (LSE: MRW). As usual, I’ll start with a look at some fundamentals:

Company Tesco Sainsbury Morrison
Market cap £29.8bn £7.3bn £6.7bn
Recent price 365p 387p 286p
Share price growth 8% 16% 0%
Historic EPS growth -11% 9% 7%
Forward EPS growth 0% 6%

-5%

Forward EPS growth +1 5% 6%

4%

Historic P/E 10.3 11.8 9.2
Forward P/E 11.2 12.0 11.1
Forward P/E +1 10.7 11.3 10.7
Historic Dividend 4.0% 4.6% 4.7%
Forward Dividend 4.1% 4.5% 4.5%
Forward Cover 2.2x 1.9x 2.0x

Share price growth is over the past 12 months, historic figures are for the last reported full year, forward figures are for the next forecasts.

The big fish

The obvious thing to notice is that Tesco is by far the larger of the three, with a market capitalisation of a shade under £30bn. That’s twice as big as the other two put together, and that alone is a factor in its favour. With Tesco commanding a 30% market share (Sainsbury is second with around half of that, followed by Morrison with about 12%) it just has more clout. The three tussle for a percentage point or two every year, but the market in the UK is very mature and very stable — Tesco is just staying up there.

Though there is no real room for expansion left in the UK, there is a whole world out there, and the only one of our three that has any interests overseas is Tesco — around 15% of its business comes from Europe, but more importantly, it gets 18% from Asia and its developing countries.

I recently offered a few musings on Tesco’s international prospects for the Fool’s Beginners’ Portfolio. My thoughts are essentially that Tesco did very well in some markets, like Malaysia, Thailand and South Korea, but badly misunderstood the markets in Japan, the US and China — though it is in the process of rectifying its approach to the People’s Republic.

Online, too

Morrison is the wayward one when it comes to online sales, with nothing on offer at present. It is in the process of partnering with Ocado to finally offer online sales, but that’s way behind the other two. To me, Morrison just seems fated to always be in third place and never really pioneer anything. Partly for those reasons, I really couldn’t name Morrison as my pick of the supermarkets and it’s out of the running.

The fundamentals?

I haven’t said anything about the rest of the fundamentals table so far — but that snapshot of a few figures doesn’t really offer much to distinguish the two remaining contenders. Sainsbury is on a slightly higher P/E valuation, has a slightly higher earnings forecast for the year after the current one, and is paying out more of its earnings in dividends.

But Tesco is not far behind on those measures, and it’s arguable that retaining a little more of its earnings to reinvest in its current turnaround plan will be more profitable in the long run.

The winner

I know it’s boring, but I’m going to stick with Tesco again — it has the biggest market clout in the UK, does a significant amount of its business in developing markets with greater prospects, is in fact the only one with any overseas interests at all, and it’s a company that is not afraid to try new things.

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> Alan does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.