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Here’s Why Kingfisher plc Still Looks A Better Buy Than Tesco PLC

Shares in Kingfisher (LSE: KGF) rose by more than 4% when markets opened this morning.

The gain came despite the firm, which owns B&Q, Screwfix and several European DIY chains, announcing a 5.9% fall in trading profits, which dropped from £779m in 2013/14, to £733m in 2014/15.

Change is coming

The shares rose because City investors were pleased with the turnaround plans outlined in today’s results. Kingfisher announced today that it will be closing 60 B&Q stores, along with a number of loss-making European stores.

The firm’s new chief executive, Véronique Laury, said that she will focus on creating a “single, unified company”, eliminating local management differences that across the group’s businesses at the moment.

There will be a particular focus on creating uniform garden and bathroom offerings, and on standardising product ranges and store formats across the firm’s businesses.

Kingfisher vs. Tesco

Like Tesco (LSE: TSCO), Kingfisher has a new chief executive who is determined to turnaround underperforming parts of the business and improve profitability.

Unlike Tesco boss Dave Lewis, however, Ms Laury — who previously ran Kingfisher’s French operations — is starting from a relatively strong position:

 

Kingfisher

Tesco

5-year average sales growth

+1.0%

+0.5%

5-year average earnings per share (eps) growth

-0.5%

-6.9%

Operating margin

6.3%

2.7%

Kingfisher’s operating margins are nearly three times those of Tesco, and there’s also another big difference: Tesco has net debt of £7.5bn, whereas Kingfisher has minimal debt and boasts net cash of £329m.

This means that Kingfisher’s finance costs are minimal, and it’s able to return more cash to shareholders — Kingfisher paid a special dividend of 4.2p per share last year.

Today’s best buy?

As a long-term Tesco shareholder, I’ve no plans to sell my shares, but if I was buying today, I’d be more likely to invest in Kingfisher than Tesco. Here’s why:

 

Kingfisher

Tesco

2014/15 yield

2.6%

0.8% (forecast)

2014/15 P/E

18.1

24.2 (forecast)

2015/16 forecast P/E

16.8

23.0

Despite much lower profit margins and a very poor prospective yield, Tesco is more highly rated than Kingfisher.

In my view, much of Tesco’s likely recovery is already in the share price, leaving less upside than at Kingfisher, which also offers a more attractive dividend yield.

The only downside to Kingfisher, as a long-term holding, is that its sales are likely to be more cyclical than those of Tesco: in a recession, we don’t stop buying groceries, but if cash is tight, home improvements will go on the back burner.

I reckon Kingfisher is a high-quality business that offers an interesting alternative for supermarket investors.

However, I believe there is a much more exciting opportunity elsewhere in the retail sector.

Kingfisher may deliver steady growth over the next few years, but the Motley Fool's analysts have identified a UK retailer where sales could triple over the next five years.

The firm concerned is in the early stages of a major online expansion: earnings per share have risen by 89% over the last five years, and the Fool's experts believe there's much more to come.

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Roland Head owns shares in Tesco. The Motley Fool UK 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.