Fool's Eye View

[ November 22, 2000 ]

Sainsbury v Invensys

By Rob Davies (TMFEssex)

Carburton Street, London -- These days everyone is after your money: your spouse, the kids, the bank, the building society, the credit card and the stock market. Eh? Yep, companies want you to invest in them so they are touting for your savings as much as anyone else. Except of course they can't actually advertise to encourage you to buy their shares. Instead, they use their results statements as a marketing document to put a nice shiny face on the company that effectively says "Please invest in me".

In a world where we are spoiled for choice they are keenly aware that they have to fight hard for our money so let's look at two companies that have reported interim results today; Invensys (LSE: ISYS) and Sainsbury (LSE: SBRY). Now, obviously these are two vastly different companies, but that doesn't matter to us as investors. All we want to know is where our money will get the best return in the future. It seems a no-brainer on the face of it. Invensys has lurched from one disaster to another in the last few years, while Sainsbury still does a pretty good job even though it has conceded the top spot in food retailing to Tesco (LSE: TSCO).

Starting at the top, Sainsbury said Group sales rose 7.7% to £9.8b, although like-for-like sales only rose 0.7% after excluding petrol and the Easter effect. Over at Invensys ongoing sales were also up 8%, to £3,665m but organic sales only rose 1%. Surprisingly similar growth rates although the retailer is much bigger than the engineer. Yet drop down a few lines in the profit and loss account and we see that the shop recorded an operating profit of £331m while the metal basher made £327m. The gap has almost closed. Then it starts to get complicated because of exceptional charges so at the bottom line Sainsbury made a net profit of £239m while Invensys had a net profit from continuing operations of £255m. Although its reported net profit after charges was only £43m.

However, even though Invensys makes more money than Sainsbury it is much cheaper. It has a market capitalisation of only £5,738m compared to £8,098m for the shop. There is of course far more to the story than just the market cap. Debt is a big problem for Invensys with the net figure standing at £2,989m while Sainsbury's is a more modest £1,458m.

Now this is where it does start to get interesting because Invensys also announced today that it plans to sell 25% of its Power Systems division by way of a listing on the LSE. This business is growing sales at a compound annual growth rate of 24% and should achieve a good price. Presumably part of the proceeds will be used to reduce some debt in the parent company.

So investors can choose between a safe, but dull, retailer on a price to earnings ratio of 17 or a riskier, but potentially faster growing, engineer/software companies on a price earnings ratio of 11. This Fool thinks the engineer offers better value over the long-term, but tell us what you think on the Fool's Eye View discussion board.

Where next?

• Invensys plc Discussion board

• Sainsbury (J) plc Discussion board