The FTSE 100 is down around 1,000 points from its all-time high of 7,104, reached in April. Many investors are on the hunt for blue-chip bargains.
I’m not convinced the Footsie’s supermarkets Tesco (LSE: TSCO), Sainsbury’s (LSE: SBRY) and Morrisons (LSE: MRW) offer the best value for money right now. Indeed, I wouldn’t be surprised if the shares of these three companies go on to test their previous lows.
Share prices
The three supermarkets have lost between a third and half their value over the last five years, but let’s look at the key movements in the shares over the most recent 12 months:
- Tesco: current share price 190p — down 24% from 52-week high — 13% fall required to return to 52-week low.
- Sainsbury’s: current share price 240p — down 21% from 52-week high — 6% fall required to return to 52-week low.
- Morrisons: current share price 167p — down 20% from 52-week high — 9% fall required to return to 52-week low.
All three companies made their lows last autumn. They rallied more strongly than the wider market through to March/April this year, but have since gone into reverse with a vengeance. There are good reasons for the change in sentiment.
Market share
For the 12 weeks to 21 June, grocery watchers Kantar Worldpanel reported a 0.3% loss of market share for Tesco, a 0.2% loss for Sainsbury’s and a modest 0.1% gain for Morrisons. Latest figures for the 12 weeks to 16 August show losses across the board: Tesco -0.5%, Sainsbury’s -0.1%, and Morrisons -0.2%.
Discounters Aldi and Lidl continue to eat relentlessly into the big supermarkets’ share, gaining 0.8% and 0.5%, respectively, during the latest 12 weeks, following on from 0.8% and 0.3% in the previous period. Upmarket grocer Waitrose also continues to nibble away at the big supermarkets’ share, posting a 0.2% gain, following on from a 0.1% gain.
UK consumers may have had more money in their pockets recently, but there’s no indication they’re abandoning the shopping strategies adopted during austerity to return in their droves to the mainstream supermarkets. All the signs are that there has been a structural shift in shopping habits — to the detriment of Tesco, Sainsbury’s, Morrisons and fellow “Big Four” member Asda (owned by US group Wal-Mart).
Responses
The Big Four are in a difficult position. Aldi and Lidl have just under 10% of the market, and it’s not hard to imagine their doubling their share within a decade. Furthermore, the mainstream supermarkets have to go some way towards competing on price, but because of their higher costs this means lower margins. Lower margins really do look like a “new normal” and it could be years before the companies’ profits exceed their previous peaks.
Trying to balance value, quality and service, in competing against each other, and against the unambiguous offerings from no-frills discounters and high-end grocers, appears to be a precarious business, and surely one that will be difficult to get consistently right for any length of time.
Valuation
The consensus among City analysts is for a big bounce in 2016/17 earnings from Tesco (+37% after four years of declines) and Morrisons (+20% after three years of declines). Sainsbury’s, with two year’s of declines has its bounce pencilled in for 2017/18.
I see the consensus as optimistic, and downside risk to forecasts. For example, Tesco needs to strengthen its balance sheet by selling some of its profitable businesses; Sainsbury’s margins have been historically the thinnest, and it would also suffer most from an expected launch of Amazon‘s food offering in London/South-East; Morrisons is reportedly back-tracking on its attempt to build a convenience store arm (a growth channel in the sector) and is considering disposing of its M Local estate.
Consensus earnings forecasts for 2016/17 put Tesco on a P/E of 17.1, Sainsbury’s on 11.3 and Morrisons on 13.8. These aren’t super-bargain P/Es by any means. But, I think the bearish end of the analyst earnings spectrum is more realistic, and, if the consensus moves towards it, the shares of the three companies could easily test their previous lows.
