J Sainsbury (LSE: SBRY) has just published its annual results. Sainsbury’s is the last of the big three FTSE 100 supermarkets to report; but should it be ahead of Tesco (LSE: TSCO) and Wm Morrison Supermarkets (LSE: MRW) on your investing shopping list?
Let’s begin with a round-up of the year’s key numbers.
| Sainsbury’s | Morrisons | Tesco | |
| Revenue | -0.7% | -4.9% | -2.0% |
| Statutory profit before tax | £72m loss | £792m loss | £6,376m loss |
| Underlying profit before tax | £681m (-14.7%) | £345m (-52.0%) | £961m (-68.4%) |
| Underlying EPS | -19.5% | -52.8% | -70.6% |
As we know, all the supermarkets are battling in a competitive environment, but the table above shows the extent of Sainsbury’s relative outperformance over the last year. At both the top line and bottom line Sainsbury’s was well ahead of its rivals.
Of course, in absolute terms, falling revenues and profits aren’t things investors like to see. And the three companies have been busy telling us how they intend to turn their businesses round. Despite Sainsbury’s coming out relatively well in the table above, City analysts see a very different picture ahead. The table below shows earnings-per-share (EPS) forecasts for the next two years.
| Sainsbury’s | Morrisons | Tesco | |
| Underlying EPS 2015/16 | -18% | +6% | +5% |
| Underlying EPS 2016/17 | 0% | +19% | +27% |
As you can see, analysts are expecting Sainsbury’s to struggle, but Morrisons and Tesco to get earnings motoring again. I’ve listened to the companies’ conference calls with analysts, and the financial projections, assumptions and interactions of moving parts are mind-bogglingly complex. As a humble private investor, I can only rely on the analyst consensus forecasts. But what I can do for myself is take a view on the valuations those forecasts produce, and on how the companies’ directors comes across in reports, on conference calls and so on.
So, beginning with valuation, the table below shows price-to-earnings (P/E) ratios based on the consensus EPS forecasts for the next two years.
| Sainsbury’s | Morrisons | Tesco | |
| P/E 2015/16 | 12.7 | 16.3 | 22.8 |
| P/E 2016/17 | 12.7 | 13.6 | 17.9 |
Clearly, Sainsbury’s has the “value” P/E, while the market is placing a premium on the superior earnings growth forecasts for Morrisons and, in particular, Tesco. Choosing between low P/E with low growth and high P/E with high growth is never easy; sometimes the former will prove the better bet and sometimes the latter.
What about impressions of management at the three companies?
Well, I’ve been impressed with Tesco since Dave Lewis joined as chief executive last September. He’s met legacy issues head-on, his business strategy for recovery appears credible, and he’s come across as frank and direct whenever I’ve seen him in action.
Morrisons’ new chief executive, David Potts, only joined in March. He’s shaping up as straight-talking and decisive, having already sacked half the senior management team and ditched some of his predecessor’s pet projects, but it’s too early yet for me to have formed any real view.
I’m rather less impressed with Sainsbury’s management, who always seem to me to be a little too pleased with themselves and not always as transparent as I would like. On the latter point, there was a notable example in today’s results. The Financial Reporting Council has urged companies to provide clarity on commercial income (which was at the heart of Tesco’s accounting scandal). Tesco and Morrisons have both provided enhanced disclosure. Sainsbury’s has not, claiming the information is too “commercially sensitive” to disclose in the income statement and “not significant” in the context of the balance sheet “as a whole”.
Everyone would agree with one thing Sainsbury’s chief executive, Mike Coupe, said today, though: “The UK marketplace is changing faster than at any time in the past 30 years”.
It’s hard to pick the winners and losers when an industry is undergoing structural change. Because of this, and because I see little to choose between the three companies when I put the valuation numbers and my impressions of management together, I think I would be tempted to split my investment across the supermarkets if I were investing in the sector today.
