3 Reasons Why Tesco PLC Still Isn’t As Cheap As J Sainsbury plc & Wm. Morrison Supermarkets plc

tesco2Tesco (LSE: TSCO) shares have fallen by 42% so far this year — further than both J Sainsbury (LSE: SBRY) — down 29% — and Wm. Morrison Supermarkets (LSE: MRW), which is down 33%.

Despite this, Tesco is still more expensive than its rivals on some key measures, as I’ll explain in this article.

1. Book value

Book value — or a company’s theoretical sale value — is important, especially for firms with large property portfolios, low profit margins, and physical stock inventories, such as supermarkets.





Share price (24/09/14)




Price/book value




Price/tangible book value




From these figures, it’s clear that Sainsbury’s is currently the cheapest supermarket, trading at just 83% of its book value.

2. Trade price

Professional investors and trade buyers usually prefer to value firms using the EV/EBITDA ratio, rather than P/E.

EV/EBITDA stands for enterprise value (market cap plus net debt) divided by earnings before interest, tax, depreciation and amortisation (EBITDA).

In my view, EV/EBITDA is a very useful measure for private investors, as it enables you to compare the valuation of firms with different debt levels:








6.9 (forecast)

On this measure, Sainsbury’s is a clear winner, with a very low EV/EBITDA ratio of 4. Tesco also looks affordable, on 5.6.

Morrisons traded at a loss last year, making a calculation impossible, but assuming the firm’s full-year figures are in line with this year’s interim results, Morrisons trades on a EV/EBITDA ratio of 6.9, making it the most expensive of the bunch.

3. Return on capital

Another valuation metric that’s favoured by professional investors is return on capital employed (ROCE) — the return the company generates from its equity and debt capital.

This can be calculated as operating profit / (equity plus debt).

ROCE is an important measure of how profitable a company really is, and enables you to see whether your money could generate a better return elsewhere.





Return on capital employed



7.7% (forecast)

Again, Sainsbury’s scores highest, Tesco second, and Morrisons last, based on last year’s reported figures from Tesco and Sainsbury’s, and this year’s first-half figures from Morrisons.

Which should you buy?

Both Sainsbury’s and Tesco have yet to report their interim results. I expect both to report lower profits than for the same period last year, but Sainsbury’s discount to book value gives it the edge as a buy, in my view.

Morrisons is the only firm that’s in the clear at the moment, as its first-half results were as expected and, in my view, cautiously positive, so I retain my buy rating on the stock.

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Roland owns shares in Morrisons and Tesco. The Motley Fool owns shares in Tesco.