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Is Marks and Spencer Group Plc A Better Buy Than J Sainsbury plc?

Shares of Marks & Spencer (LSE: MKS) jumped over 5% in early trading this morning after the company released a Q4 update with performance ahead of market expectations.

The iconic high-street retailer reported total sales up 1.9%, comprising: Food (+3.7%), General Merchandise (+1.3%), M&S.com (+13.8%) — and only International sales showing a decline (-3.8% at constant currency; -6.3% at actual exchange rates). The international performance was largely out of the company’s hands: in addition to the impact of a weakening Euro, macro issues hurt franchise partnerships in Russia, Ukraine and Turkey.

The really big positive in the results was the performance of general merchandise, where positive sales, including a 0.7% rise in like-for-likes, ended 14 consecutive quarters of declines. In particular, M&S seems to have got its fashion offer right back on track, which means clothing, footwear and homewares are no longer a drag on the company’s continuing strong performance in food.

It happens that just as M&S has got both its major divisions firing, J Sainsbury (LSE: SBRY), which had previously been in that position, has now seen its food sales stall and go into reverse.

Is it now time to invest in M&S — and even to sell Sainsbury’s in order to do so?

Let’s have a look at some numbers. The table below shows earnings growth for the two companies over the last four years, and analyst estimates (e) for the next three.

 

2011

2012

2013

2014

2015 (e)

2016 (e)

2017 (e)

M&S

+5%

0%

-9%

+1%

+1%

+8%

+8%

Sainsbury’s

+11%

+6%

+10%

+6%

-23%

-14%

+3%

M&S’s positive update today seems to confirm analyst forecasts that the company is on the cusp of a shift to strong earnings momentum, while Sainsbury is expected to go the other way.

How about valuation? Well, current-year estimates (ahead of today’s update) put M&S on a P/E of 17.2, falling to 16 for next year and 14.8 for 2017. The multiples for Sainsbury’s are 10.2, 11.8 and 11.5. I would imagine we’ll see some earnings upgrades for M&S, lowering its P/Es — although I’m sure they’ll remain higher than those of Sainsbury’s as the two companies’ share prices currently stand (560p and 260p, respectively).

What about dividends? Well, it’s a similar story to earnings, with M&S having the momentum and Sainsbury’s having a stalling, but higher, yield. For the current year, forecasts put M&S on a yield of 3.2%, rising to 3.3% next year and 3.6% for 2017. The yields for Sainsbury’s are 4.9%, 4.2% and 4.3%. Again, we could see some upgrades to M&S’s dividend forecasts — but again, I’m sure the yields will remain lower than those of Sainsbury’s at current share prices.

It’s easy to underestimate the importance of momentum in retailing, and I think that on a 3-5 year view M&S could deliver a better return for investors than Sainsbury’s, despite the latter having “cheaper” earnings and dividend ratings. I’m not sure, though, that M&S’s prospects are so good and Sainsbury’s so poor that if I already held the latter’s shares I would rushing to sell them to buy into M&S.

However, whether you own shares in either of these companies -- or neither -- I'm sure you'd be interested in a big retail growth story that's about to break from under the radar. This established high street name -- a leader in its sector -- is on the brink of a bold global e-commerce expansion that could TREBLE profits within 5 years.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.