The UK supermarket sector is continuing to experience a highly challenging period, with top and bottom line numbers coming under pressure. In fact, blood continues to run in the aisles of supermarket chains such as Morrisons (LSE: MRW) and Tesco (LSE: TSCO), with both companies still struggling to compete with no-frills operators such as Aldi and Lidl, while also being squeezed at the premium price point by the likes of Waitrose.
However, as all investors know, the best time to buy any stock is when its future looks the bleakest. As such, now could be a great time to take a look at the supermarket sector but, looking ahead, does Morrisons or Tesco offer the most appealing turnaround story?
Investor Sentiment
Clearly, Tesco is a step ahead of Morrisons, with it having appointed a new CEO and management team and having a clear and coherent strategy for regaining its crown as the ‘darling’ of UK retailers (or, at the very least, returning to satisfactory levels of profit growth). As such, its shares have already experienced a short term boost, with investor sentiment improving dramatically so as to push them an incredible 40% higher in the last three months.
Meanwhile, Morrisons’ share price is up just half that amount over the same time period. It has appointed its new CEO (who starts work on 16 March) and is still planning on how it will turn its business around.
One area that seems to be due for significant change is a slowdown in the company’s ambitious rollout of smaller, convenience stores, the performance of which has been somewhat underwhelming. Also likely are closures of a number of underperforming larger stores, as well as cost cutting and less of a focus on price matching peers, as UK consumers begin to have more disposable income (in real terms) moving forward. As a result, it appears as though Morrisons could experience a short term boost to its share price from the market’s reaction to its new strategy.
Looking Ahead
Clearly, both companies have a long way to go before returning to full health and, until then, their share prices are likely to remain very volatile. However, with new management teams, they are likely to be more decisive and more ruthless when it comes to making the changes necessary and, with the wider economic outlook being positive, they could benefit from a tailwind that improves their performance in the months ahead.
In terms of their valuations, Morrisons seems to have more appeal than Tesco. For example, it trades on a price to earnings (P/E) ratio of 16.4, which is far lower than Tesco’s P/E ratio of 21.1. Furthermore, Morrisons has a price to book (P/B) ratio of 1.33, which equals that of Tesco, but with the latter due to report asset write downs in its results release in April, Morrisons seems to offer better value for money based on its net asset value, as well as earnings.
As such, and while both companies are fantastic long-term buys, Morrisons has further to go than Tesco and, as a result, could prove to be a more lucrative turnaround play.
