Just How Low Can Tesco PLC, J Sainsbury plc And Wm. Morrison Supermarkets Go?

tesco2Is the supermarket sector in terminal decline? Clearly not, but you could be forgiven for thinking so if you look at recent share price slumps.

All three of the FTSE 100 supermarkets have crashed to 52-week lows in recent days!

Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) managed the feat on 11 August, dropping to a smidgen above 241p, and as I write these words it’s only a little better than that at 245p. That’s a loss over 12 months of around 33%.

Things don’t look much better at J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US). Sainsbury keeps winning awards and garnering accolades, yet its share price tumbled to its 52-week nadir of 292p on 8 August, before picking up a few crumbs to get back over 300p this week.

Biggest drop

But the one that has suffered the worst is Wm. Morrison (LSE: MRW), whose shares have collapsed by an astonishing 42% over the course of a year. The price plumbed the depths of 164.6p on 6 August, and came close again on 13 August with a low of 164.7p — by early afternoon the same day it had manged to perk up to 168p.

What’s going so badly wrong? Here’s a look at last year’s fundamentals and current forecasts for all three:

Year to…     Tesco     Sainsbury Morrison
EPS growth 2014 -5% +6% -8%
P/E 2014 10.4 9.6 9.5
Dividend Yield 2014 4.4% 5.5% 5.4%
Dividend Cover 2014 2.17x 1.90x 1.94x
EPS growth 2015*
-22% -7% -52%
P/E 2015 9.8 10.1 13.8
Dividend Yield 2015 5.7% 5.5% 7.8%
Dividend Cover 2015 1.77x 1.80x 0.91x
EPS growth 2016* -3% -1% +17%
P/E 2016 10.1 10.3 11.8
Dividend Yield 2016 5.5% 5.4% 6.8%
Dividend Cover 2016 1.76x 1.78x 1.21x

* forecast
Note that years end Jan-Mar

morrisonsThe worst

On those figures, Morrison looks very much the sickest of the three. It’s been woefully late getting its online shopping operation going, and it’s really only just waking up to the benefits of smaller local outlets, convenience stores, and the whole range of shop sizes — way later than the other two were pioneering those new developments.

As a result, there’s a horrendous year in store for the coming year, and the modest respite predicted for 2016 is not going to cheer up the bears. And look at those dividend yields — 7.8% forecast this year, and not covered by earnings. If you think you’re actually going to get that, well, I think you’ll be disappointed.

 SBRYThe big two

Tesco and Sainsbury are both clearly suffering from the downturn, with Tesco’s well-publicized woes going on for a good bit longer than many expected. There are fears of dividend cuts, and some analysts are predicting that will happen for both of them.

But yields of around 5.5% are very strong compared to the long-term sector average, and even a cut to around 4.5% would, in my opinion, be enough to support P/Es at current levels of around 10 — although a paring of the cash handout would surely send the shares further down.

Too cheap?

Can the prices really keep on heading down? The answer is a clear yes, but if that happens I reckon Tesco and Sainsbury shares will become even better bargains than they are now. But I wouldn’t buy Morrison.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool owns shares of 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.