What? Sainsbury is better than Tesco!? Sacrilege!
Supermarket shares are popular with defensively minded investors. After all, we all have to eat. And less seriously-minded investors also like them on the basis that we're all experts in deciding which supermarket is the best for our money – so why not get a few shares, too?
Of all the big guns, though, Sainsbury (LSE: SBRY) has provided its loyal shareholders with inferior capital returns over the last couple of years. In fact, Sainsbury has underperformed Tesco (LSE: TSCO) by around 16% since the stock market low on 9th March. And on a longer term view, the share price performance is even worse; Sainsbury is more lowly priced now than it was back in 1991.
Terminally ill?
You could be forgiven for thinking, then, that the UK's oldest supermarket chain is terminally ill, ceding market share to more aggressive, better organised rivals; at least, this is what the share price seems to be telling us. And there is some truth in this. Sainsbury has been losing market share, and has given us a few profits warnings from time to time. Then there was the failed bid for the Safeway chain and the breakdown of the takeover offer by an investment fund in 2007, which did nothing to cheer long-standing investors.
And today's trading statement seems to confirm that Sainsbury is continuing to lose out to its main rival. It warned that sales growth across the market is set to slow over the next few months. Like-for-like sales for the 16 weeks to 3 October rose 4.6% excluding fuel, despite a "challenging environment", but in the previous quarter they were up by 7%.
The supermarket that cried wolf!
But whilst Sainsbury may not have been quite as dynamic as its main rival, these things have a habit of turning in the long run. In other words, it could be Sainsbury turn next. This may all sound a bit like the boy who cried wolf! Sainsbury has, after all, been something of a serial disappointer for those who think it's fundamentally better value than its main rivals.
As I write, the shares are down by more than 3% at 313p, valuing the group that owns 502 supermarkets and 290 convenience stores, as well as Sainsbury's Bank at £5.8bn. Tesco, meanwhile, is well over five times as valuable, but has less than three times the turnover. Sainsbury also has a healthier balance sheet for value hunters with a price to tangible book value (PTBV) of 1.3, versus the 3.6 of its bigger rival.
But it's all about profitability and perceived future growth. On forward price-to-earnings ratios, there's little to choose between these two -- or Morrison (LSE: MRW) for that matter, though Sainsbury's prospective yield is the healthiest at around 4.9%.
Best of the bunch
For me, the ratios are reason enough to prefer Sainsbury of all the big UK-based supermarkets from an investment point of view. Of course, this view is grossly over-simplistic and takes little or no account of the many and varied factors that will affect future performance. But that's exactly my point really.
For those of us who prefer to be boring when buying blue-chip investments, such sweeping value-based judgements are the best ones to take. Who really knows what the supermarket and general retailing environment will look like in a year, two, three or ten? But Sainsbury will still be around and paying a good dividend -- and it's best to buy on weakness. Its asset base and relative lacklustre performance when compared to its main rivals also make it a fair more likely candidate to be taken over in my opinion.
These things have a habit of working themselves out while investors go off do something less boring instead.
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