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MARKET COMMENT
By
Carburton Street, London -- It's been a bumper year for supermarket investors. Buoyed by robust domestic trade and successful international expansion, Tesco (LSE: TSCO) shareholders have seen their investment increase by almost 50% during 2000. Elsewhere, the installation of new management at both J Sainsbury (LSE: SBRY) and Safeway (LSE: SFW) has underpinned 15% and 44% increases in their respective market values. And even the low profile William Morrison (LSE: MRW) has put in a very impressive performance, improving its share price by 35% since January 1st. But can those shareholder returns continue into next year? Given the current valuations and near-term growth prospects of the top four quoted supermarkets, 2001 looks to be a year when the sector pauses for breath. This year, supermarket investors have had three positives. They've benefited from the gradual stock market switch from "new economy" to "old economy", the delay in the sector bloodshed threat from Asda/Wal-Mart (NYSE: WMT) and a favourable industry report from the Competition Commission. However, it seems all the good news has been amply applied by the stock market. With Tesco's shares at 281p, Sainsbury's at 400p, and Morrison's at 181p, all three stand on prospective price to earnings (P/E) ratios of 20 or above. Even though Tesco perhaps deserves a premium rating due to its overseas forays, the fact is that earnings growth for those three operators is only forecast to be around 10% next year. Albeit widely recognised as the underperforming member of the sector, only Safeway rests on what appears to be an undemanding rating. With its shares at 307p, Safeway sits upon a forward P/E of 15. Similarly to its sector peers, analysts also expect Safeway to generate 10% earnings growth next year. Overall, it's only the lower-rated Safeway shares that appear to have any opportunity for further improvement during 2001. As Foolishly reviewed at the company's half-year stage, Safeway's ongoing revival "looks set to deliver improved results for the full year" with tighter cost control being "further confirmation of the successful implementation of its new corporate strategy". However, Sainsbury's long-awaited recovery isn't so clear-cut and given its full rating at the moment, so the group's shareholders shouldn't expect a repeat of this year's share price gains anytime soon. And with the class acts of the sector, Tesco and Morrison, looking fully valued too, the inherently mature and ultra-competitive nature of the industry should help to keep a lid on supermarket share price gains in the year to come. Where Next? Visit the Tesco discussion board -- latest Tesco share price and news
Visit the J Sainsbury discussion board -- latest J Sainsbury share price and news
Visit the Safeway discussion board -- latest Safeway share price and news
Visit the William Morrison discussion board -- latest William Morrison share price and news
