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Why Wm. Morrison Supermarkets plc Is A Better Buy Than Tesco PLC And J Sainsbury plc

Shoppers’ heads are spinning these days with basket comparisons, price promises, card points and all the rest. Is it any easier for investors shopping for supermarket shares?

Today, I’m looking for a value-stock winner from the three big FTSE 100 supermarkets: Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), J Sainsbury (LSE: SBRY) and Wm Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US).

Let’s start with some fundamental data and key valuation measures.

  Tesco Sainsbury Morrisons
Share price 369.1p 398.0p 286.5p
Forecast earnings per share 30.74p 30.39p 25.31p
Forecast cash flow per share 49.83p 59.53p 44.06p
Forecast book value per share 220.34p 315.80p 234.40p
Forecast dividend per share 14.76p 17.52p 13.09p
Price/earnings 12.0 13.1 11.3
Price/cash flow 7.4 6.7 6.5
Price/book 1.7 1.3 1.2
Dividend yield 4.0% 4.4% 4.6%

Source: Morningstar

Earnings

The forward price-to-earnings (P/E) ratios of all three companies tell us the supermarket sector is out of favour with investors. Even Sainsbury, the most expensive of the trio on a P/E of 13.1, is several clicks below the FTSE 100 average. Morrisons takes the value crown for earnings with a P/E of 11.3.

Cash flow

If you don’t trust accounting earnings, and have more faith in hard cash flow, Morrisons again leads the pack for value. Morrisons is trading on a price/cash flow (P/CF) ratio of 6.5, just ahead of Sainsbury’s 6.7, while Tesco is significantly pricier than its rivals on a P/CF rating of 7.4.

Assets

Morrisons comes up trumps again on the assets rating of price/book (P/B). Again, Morrisons shades Sainsbury — with a P/B of 1.2 versus the latter’s 1.3. And again, Tesco is a jump more expensive than its rivals on a P/B of 1.7.

Dividend

It’s a clean sweep for Morrison. The prospective dividend yield of 4.6% is superior to both its brethren, and 1.5% ahead of the FTSE 100 average.

Contrarian

Clearly, Morrisons is the contrarian bet within the supermarket sector. Going against the flow, by being the investing equivalent of an aisle salmon, can pay handsome rewards.

Critics of Morrisons bemoan its laggard status in online and convenience stores. But there’s another side to that coin: plenty of low-hanging fruit to fuel Morrisons’ growth.

Of course, with the whole sector out of favour, there’s an argument for investors to hedge their bets by spreading an investment across all three companies. I think there’s a good deal of merit to that argument.

Nevertheless, investors who decide to put all their eggs in the Morrisons basket will be in good company. Morrisons is the only supermarket that ace City contrarian investor Neil Woodford deems worthy of holding.

If you're interested in learning about Woodford's other current favourite blue-chip stocks, you can help yourself to our newly updated Woodford report.

You see, the report is free with our compliments and gives an in-depth analysis of eight of the master investor's biggest holdings. But do hurry, this exclusive offer is available for a limited time only -- simply click here now.

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