Is Ocado Group PLC A Better Buy Than WM Morrison Supermarkets PLC And J Sainsbury plc?

With the UK supermarket sector enduring its toughest trading period in living memory, it’s understandable that many investors feel that now is not the right time to buy a slice of the likes of Morrisons (LSE: MRW) and Sainsbury’s (LSE: SBRY). After all, their top and bottom lines continue to decline, and there is little sign of a step-change in margins or profitability in the near future.

However, it’s not all doom and gloom for the sector. For example, Ocado (LSE: OCDO) continues to post double-digit sales growth and last year posted its first ever annual profit. Could this mean, then, that Ocado is a better place to invest your hard-earned cash than Morrisons and Sainsbury’s?

A Growing Market

While the internet has changed the way that we buy an array of products, grocery shopping remains behind the curve when it comes to the online channel. In fact, only 20% of shoppers buy most or all of their groceries online, which when you consider how easy it is to do, seems to be somewhat low.

That’s where investing in Ocado could make sense. It looks set to post strong sales and profit growth moving forward, since there is substantial scope for an increase in the proportion of people shopping for groceries online. As such, Ocado’s financials should gain a boost from a growing market and, while Morrisons and Sainsbury’s also have an online offering, that growth could be offset by a decline in physical store sales.

Share Price Gains

That’s a key reason why Ocado’s share price has outperformed those of Morrisons and Sainsbury’s over the last year. However, the difference in performance may not be as great as you would expect, given the dire sales numbers posted by Sainsbury’s and Morrisons, and the comparatively upbeat numbers of Ocado. For example, over the last year Ocado’s share price is only up by 4%, while Morrisons has fallen by only 2% and Sainsbury’s is down by 18%.

Looking Ahead

While Ocado looks set to offer better growth prospects than Sainsbury’s or Morrisons over the medium term, its share price may not post the same kind of outperformance. That’s because Ocado offers little in the way of a margin of safety at the present time with, for example, it trading on a price to book (P/B) ratio of 9.2. This indicates that vast earnings growth is already priced in to Ocado’s share price, which could mean that its share price growth disappoints after a rise of 116% in the last five years.

Meanwhile, Morrisons and Sainsbury’s have P/Bs of only 1.3 and 0.9 respectively and, while they could be subject to asset write downs moving forward, they offer considerable long term upside. Furthermore, with them both offering exposure to the convenience store space, they offer greater diversity and, arguably, more stability than Ocado for long term investors. As such, Morrisons and Sainsbury’s appear to be better buys than Ocado, and could turn the tables on years of underperformance versus their pure play online peer.

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Peter Stephens owns shares of Morrisons and Sainsbury (J). 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.