It’s hard to believe that Tesco (LSE: TSCO) and Morrisons (LSE: MRW) are two of the FTSE 100’s worst performers this year. Both companies have underperformed the FTSE 100 by more than 23% year to date. It would appear as if further declines are still to come.
Sales falling
The sales slump at Tesco and Morrisons has only continued to worsen in recent weeks. Indeed, recent figures from Kantar Worldpanel show that Tesco’s sales fell 3.8% year on year during the 12 weeks ending the 20th July. Unfortunately, this decline was worse than the decline recorded last month, when Kantar data showed that sales declined 1.9% during the 12 weeks to the 22nd June.
Morrisons fared no better during the period. The UK’s fourth largest grocer saw its sales fall by a similar 3.8% during the 12 week period, according to Kantar’s data.
There’s no denying that these declines are worrying. Both Tesco and Morrisons have been dragged into a price war with the discounters this year, but it appears as if their price-cutting strategies are failing to attract customers.
No let up
So, it seems as if Tesco and Morrisons aren’t going to start winning over customers any time soon. Until sales start to recover, it’s likely that their shares will remain under pressure.
Still, for bargain hunters there is value to be found. For example, Morrisons is now trading below its book value per share, or as it is sometimes known, liquidation value. In particular, Morrisons’ book value per share currently stands at 200p per share.
Nevertheless, despite this discount to book, it is possible that Morrisons could see its shares fall further, as at present levels the company actually looks overvalued in comparison to peers. Morrisons’ shares currently trade at a forward P/E of 13.6, 36% above the average forward P/E of Tesco and Sainsbury’s. If Morrisons’ valuation were to drop into line of that of its peers, the company’s shares would fall to approximately 124p.
Undervalued
Tesco is currently the world’s second biggest grocer in terms of sales, using current exchange rates and based on 2013 figures. However, the retailer trades at one of the lowest valuations in sector.
Specifically, for its last reported financial year, Tesco reported sales of £64bn, Carrefour reported sales of around £61bn and Wal-Mart reported total sales of more than £200bn. Right now, Tesco trades at a forward P/E of around 10, while Carrefour and Wal-Mart trade at forward P/Es of 16.3 and 13 respectively.
