Is SSP Group PLC A Better Buy Than Tesco PLC And WH Smith Plc?

Should you buy shares in food outlet company, SSP Group PLC (LON: SSPG), ahead of Tesco PLC (LON: TSCO) and WH Smith Plc (LON: SMWH)?

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Today’s news release from food outlet company SSP Group (LSE: SSPG), is very positive and shows that the company is moving in the right direction. That’s because SSP has agreed to purchase 32 outlets in Germany from Heberer for £5m. The outlets sell bakery and other food products in travel locations across Germany, with 30 being located in railway stations and 2 being in airports, and their purchase considerably increases SSP’s exposure to travel locations across Germany.

And, with the value of the gross assets that will be acquired being around £5m and having generated profit of £1m last year, SSP seems to be getting a good deal with regard to the purchase price.

Clearly, 2015 is set to be a pivotal year for SSP, with its bottom line expected to move from being in the red to being in the black. As such, it would be of little surprise for investor sentiment to improve should the company be able to deliver on its current guidance. Furthermore, with earnings set to grow by 14% next year, now could be a good time to buy a slice of the business – especially since its shares trade on a price to earnings growth (PEG) ratio of just 1.6.

Undoubtedly, the sale of food and other items at railway stations and airports is a hugely lucrative business. That’s mainly because there is a lack of competition and, with people unable to wander too far from a station or airport, it means that outlets in those locations are able to charge higher prices and generate higher margins than they otherwise would be able to.

This business model has, of course, been utilised exceptionally well by WH Smith (LSE: SMWH). It has posted increasing profitability in each of the last five years and, looking ahead, is expected to deliver an increase in earnings of 10% this year and 9% next year. Furthermore, like SSP, it appears to offer good value for money, with its shares trading on a PEG ratio of 1.9. Although this is higher than SSP’s PEG ratio, WH Smith has a much better track record of profitability and, as a result, offers less risk. This makes it a more appealing option than its smaller peer.

Meanwhile, Tesco (LSE: TSCO) may not have the enviable locations of either SSP or WH Smith. However, it does have huge turnaround potential, with the refreshed strategy being adopted by its new management team having the potential to make Tesco a far more profitable business. For example, Tesco is selling fewer products at lower prices so as to create a more efficient business model and encourage higher turnover, while a focus on convenience stores and online rather than superstores is also likely to improve the company’s long term outlook.

In the nearer term, Tesco also has vast potential. For example, it is forecast to return to bottom line growth next year following four years of decline and, even though its shares have risen by 15% since the turn of the year, they still offer excellent value for money as evidenced by a PEG ratio of just 0.5. So, while SSP and WH Smith appear to be worth buying, Tesco seems to be the preferred option at the present time.

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.

Peter Stephens owns shares of Tesco. The Motley Fool UK owns shares of SSP Group and 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.

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