These two FTSE 100 shares trade on rock-bottom earnings multiples. Are they top buys for value investors like me?
Bunzl
The rise of sustainability could have big ramifications for those focused on single-use products like Bunzl (LSE:BNZL). This week, for instance, the government announced a ban on single-use plastic cutlery, polystyrene trays and other similar products in England. It’s the latest development in a global trend that’s picking up pace.
But despite growing environmental action I still think Bunzl’s a great share to buy. And especially at current prices. Today the support services business trades on a price-to-earnings (P/E) ratio of 16.7 times for 2023. This is well below its historical average north of 22 times.
The company sells a wide range of essential everyday products and not just single-use items. It can also use its scale to capitalise on growing demand for disposable goods that use more environmentally-friendly materials.
One way could be to make acquisitions that will benefit from the growth of the green economy. Bunzl certainly has the financial strength to make profits-boosting transformative buys. Net-debt-to-EBITDA stood at 1.6 times as of June, latest data showed. This was well below its target of 2 times to 2.5 times.
I bought Bunzl shares because of the firm’s highly-successful acquisition-based growth strategy. And at recent prices I’ll be looking to buy more of its stock if I have cash to spare.
Tesco
On paper Tesco (LSE:TSCO) shares also look cheap right now. Britain’s biggest supermarket trades on a forward P/E ratio of 11.6 times. They also carry a FTSE 100-beating 4.4% dividend yield for this financial year.
But I believe this low valuation reflects the huge risk that the cost-of-living crisis poses to its profits. Thinktank the Resolution Foundation says that average disposable incomes will fall £2,100 per household in 2023. This is bound to hit demand for food and essentials, as well as discretionary items.
Strong festive trading at Aldi illustrates the effect that the cost-of-living crisis is already having on shopper behaviour. The German budget chain said 1.3m more customers flooded through its doors in the run-up to Christmas as it won customers from more expensive retailers.
Tesco is stuck in a tough situation. It can slash prices to try and stop customers leaving in large numbers. Or it can continue discounting and watch its profit margins decline to almost nothing.
Margins at the company’s UK and Ireland retail division slumped below 4% during the six months to August. And the pressure is likely to keep growing as Aldi and Lidl expand their store networks. Rising competition online from traditional rivals like Sainsbury’s and from internet specialists Ocado and Amazon poses extra danger too.
As my Foolish colleague John Choong recently commented, changes to its Clubcard app could help the supermarket fight off the competition. This will see the grocer dispatch money-off coupons to its customers more frequently. But I still believe the risks of buying Tesco shares remain too high right now.
