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Have Tesco PLC, J Sainsbury plc And WM Morrison Supermarkets PLC Finally Turned It Round?

Investment focus has been largely on the further oil slump and the crisis in Greece of late, with our FTSE 100 supermarkets enjoying a little time out of the spotlight. But the big three are looking increasingly like they’re getting past the worst of it, with the possibility of a return to earnings growth looking ever more plausible.

In its latest quarterly update, Tesco (LSE: TSCO) reported a 1.3% drop in like-for-like sales, but that was an improvement and actually wasn’t bad in a period of competition-driven price deflation. And, crucially, customer numbers and volumes of goods sold are on the up again, with Tesco telling us it enjoyed an increase of 180,000 customers in the period.

Forecasts turning

There’s still a 10% decline in EPS predicted for this year — but the steady decline in forecasts seems to have halted and, of late, a few tipsters have been lifting their predictions and their share price targets, and there are now more Buy recommendations than Sells. And for 2017, the City is expecting growth of better than 35%.

That would give us a P/E of around 18 at 210p, which I still think is a bit too high right now, but with the dividend expected to recover strongly in the next couple of years I don’t think we can be too far away from attractive pricing again.

For its first quarter, J Sainsbury (LSE: SBRY) reported a 2.1% drop in like-for-like supermarket sales, and for the full year it’s still expected to record a 19% fall in EPS. But beyond that the City seems more bullish, expecting flat earnings in 2017 with the 260p shares on a P/E of around 12.5.

Past the bottom?

Sainsbury’s dividend is expected to drop a little, but forecasts still suggest a 4% yield that should be twice covered by earnings. Earnings and dividend forecasts for this year and next have also started to turn upwards over the past month or so, although the analysts’ Buy to Sell ratio is still pretty evenly balanced.

But for patient long-term investors, I can only see sentiment towards Sainsbury getting better in the months to come.

And then we come to Wm Morrison (LSE: MRW), which has had a couple of dreadful years. The trend in forecasts hasn’t started to reverse yet, as it has for the other two, but we do have a mere 2% fall in EPS predicted for the current year followed by a 20% rise penciled in for January 2017.

Morrison’s Q1 update signaled a return to health if its outlook should come to pass, with the firm telling us it expects to see better pre-tax profit in the second half of the year than the first.

Long-term view

On fundamentals, we’re looking at a P/E of 14 for 2017, with dividends yielding 3% (and covered nearly 2.3 times). That’s bang in line with the long-term FTSE average, but if it really does represent the bottom for Morrison, then again we could be very close to a turnaround point.

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Alan Oscroft has no position in any shares mentioned. 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.