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5 Great Reasons To Buy Supermarket Shares Now

TescoIf you have shares in any of the UK’s listed supermarkets, then you haven’t heard much good news recently. 

According to Kantar Worldpanel the British grocery market is growing at its slowest rate for 11 years, as price competition hits revenues. Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) and Morrison (LSE: MRW) are all losing market share to the discounters.

But here are five great reasons to invest in companies in the sector:

1. They’re out of favour

All that bad news is one reason for looking at the shares. From Rothschild (“Buy on the sound of cannons”) to Buffett (“Be greedy when others are fearful”), contrarian investors recognise that the best time to buy is when things look bleak.

sainsbury's

2. The economy is growing

Both grocery and non-food sales should respond to the UK’s vibrant economic growth, especially if wages continue to rise faster than inflation, putting more money in people’s pockets. Growth in volumes will mitigate the impact of fierce price competition on revenues.

morrisons

3. They have large market shares

Tesco, Sainsbury and Morrison have 29%, 16% and 11% of the UK grocery market respectively, far outstripping Aldi and Lidl with under 5% each. True, those shares are shrinking, but the price war is only just beginning and the Big Four command substantial market power.

4. They have real estate assets

The supermarkets’ property assets put concrete foundations under the value of their shares. They also provide the opportunity for upside, through sale-and-leasebacks or sale of surplus property. Morrison has so-far resisted calls from activist investors to release value through a spin-off of property assets.

5. They’re cheap

Being out-of-favour means the shares are cheap. Tesco and Sainsbury are trading on prospective PEs of just 11, well below their historic norms. They are both paying 5% yields, well-covered by earnings and cash flow. Morrison’s PE is a testier 14, and its stonking 7% yield isn’t fully-covered.

Which is best?

Of the three, I like Tesco for its market power and recovery potential, and Sainsbury for its quality.

Tesco’s near-30% market share together with its broader business spread — international, non-food, banking etc — is a great base for recovery, although Philip Clarke’s reign has been an unhappy one and I suspect it may require a change of management before the company truly turns around.

I’m hoping the recent change of management at Sainsbury will be less disruptive. It has the clearest market positioning and the best track record in sales growth, only just marginally losing market share in the last quarter.

Morrison is the rank outsider. A strategic laggard, geographically-positioned in the least affluent parts of the country, its chief executive has gone all-in, betting on a price-and-cost cutting plan that will be the make-or-break of his tenure, and possibly the company’s life on the stock-market. A Morrison family-led buyout could save the day.

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Tony owns shares in Tesco and Sainsbury but no other shares mentioned in this article. The Motley Fool owns shares in Tesco and has recommended Morrisons.