MARKET COMMENT
Sainsbury v Morrison: Fulfilling Expectations

By David Kuo (TMFDragon)
January 12, 2001

Carburton Street, London – To some, myself included, the stock market can appear to be a very illogical place at times.

This morning Sainsbury (LSE: SBRY), the UK's second largest supermarket, stepped forward to provide the market with its trading update. The grocery retailer and said like-for-like sales improved 0.7%. Shares in the company ticked 4% higher. Wm Morrison (LSE: MRW), a rival supermarket of somewhat smaller stature, said like-for-like sales rose 8.8%. Its shares also improved a smidgen, up 1.8% at the time of writing this article.

Then of course, there were the events of yesterday, which saw Matalan (LSE: MTN), savaged by the markets after posting a 16.3% rise in sales. This morning, Matalan made a partial recovery, and picked up 6%.

Many may wonder why a 16% rise in sales at Matalan was punished by a 40% fall in its share price while an apparently lacklustre 0.7% rise in turnover at Sainsbury is rewarded by a 4% improvement in its stock value.

What many observers forget is that stock prices are an indication of what the market expects of these companies in the future and not what the company has done in the past.

Sainsbury has had a torrid time over the past few years, losing market share to both Tesco (LSE: TSCO) and Asda. Today's statement was a welcome relief for the market, especially with news that 4.4% more customers visited the supermarket in the quarter. Sainsbury's new chief executive Sir Peter Davis also pleased investors by revealing that the company's strategy was on course to stem its decline in profitability.

Wm Morrison demonstrated admirably its ability to compete with the supermarket giants. Its no-frills approach to food retailing is winning customers who are also spending more in its shops. But the statement released after the close of business yesterday was largely in line with what the markets were expecting. On a P/E of 24, the market clearly expects more from Morrison than Sainsbury, which is valued on a P/E of 20.

And what can we say about Matalan? Prior to yesterday's fall, Matalan was rated at over 70 times earnings. A lofty rating by any stretch of the imagination. Today, the shares are still on a P/E of over 50. Clearly a lot is expected of Matalan and any hint of a wobble could be severely punished.  

Where Next?

Sainsbury  discussion board | website
Wm. Morrison discussion discussion board | website
Matalan discussion discussion board | website