Should You Buy Booker Group Plc As It Targets Tesco PLC & WM Morrison Supermarkets PLC?

Can Booker Group Plc (LON:BOK) steal market share from Tesco PLC (LON:TSCO) and WM Morrison Supermarkets PLC (LON:MRW)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in FTSE 250 cash-and-carry operator Booker Group (LSE: BOK) rose by 10% this morning, after it announced the acquisition of the Londis and Budgens chains of convenience stores.

Booker also published its final results today. Earnings per share rose by 11%, despite sales only rising by 1.5%. The final dividend is up 14% to 3.14p, and Booker also announced that it’s planning another 3.5p per share capital return for shareholders.

Good news all round?

Booker’s results were solid, but in my view the big news is Booker’s aggressive move to become the largest player in the convenience store sector.

Booker will pay £40m for the 1,797 stores, which it will operate alongside its existing Premier and Family Shopper retail brands. Once the purchase is complete, Booker will have 4,909 UK convenience stores, in addition to its Booker and Makro cash-and-carry chains.

The deal will give Booker control of two of the five largest convenience store chains (Premier and Londis) and make it by far the biggest operator in this sector.

Why so cheap?

If you’re wondering why the price tag for Londis and Budgens is so low, it’s because Booker isn’t acquiring the actual stores, it’s acquiring the brands. The stores themselves are all independently operated (Londis) or franchised (Budgens).

The store owners are provided with branding and access to better pricing and stock choices. In return, they have to guarantee to buy a certain amount of their stock from the brand owner, which will now be Booker.

In total, Londis and Budgens sold £833m of goods last year, which would have added 17% to Booker’s total sales of £4.8bn. However, it’s worth noting that the current owner of Londis and Budgens reported an operating loss of £7.4m last year.

Booker expects the deal to have no effect on earnings in the first year and to add to profits from the second year onwards. The firm believes that a more efficient supply chain and economies of scale will drive sales growth and profits at independent stores.

Can Tesco and Morrison do better?

The question for investors, of course, is whether the big supermarkets can outdo Booker at its own game.

Supermarkets have been expanding aggressively into the convenience store sector in search of growth.

Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) now operates 1,735 Express stores, while latecomer Wm Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) has 153. These stores appear to be multiplying rapidly in every town in the UK, suggesting to me that we may soon end up with too many of them.

I suspect that both Booker and the supermarkets may end up closing some convenience stores over the next five years.

Today’s top pick?

Booker’s operating margin was 2.9% last year. That’s probably a little better than Tesco will manage this year, and broadly in-line with what I’d expect from Morrison.

Which firm looks the best buy in today’s market? Here’s how they compare:

Company 2015/16 forecast P/E 2015/16 forecast yield
Booker 23.6 3.1%
Tesco 23.3 0%
Morrison 15.9 3.1%

To be honest, none of these shares look that tempting to me at today’s prices. Why pay such a high valuation for businesses with low profit margins in an intensely competitive market?

I don’t intend to buy any of these shares at current prices.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Tesco and Wm Morrison Supermarkets. The Motley Fool UK has recommended Booker. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »