Do The Risks Outweigh The Rewards For Tesco PLC, DFS Furniture PLC And WM Morrison Supermarkets PLC?

Today’s half-year trading update from furniture company DFS (LSE: DFS) was upbeat and shows that it’s on track to meet full-year expectations.

Encouragingly, DFS maintained good sales growth throughout the first six months of the year, with it reporting gross sales growth of 7% during the period. Part of the reason for this was the implementation of various growth initiatives including a measured programme of store expansion, continued development of DFS’s omnichannel presence and a constant enhancement of its product range.

With DFS forecast to increase its bottom line by 5% in the current year however, its bottom-line performance may be rather underwhelming given the positive macroeconomic outlook for the UK. And with DFS’s shares trading on a price-to-earnings (P/E) ratio of 13.6, they don’t appear to offer particularly enthralling value for money at the present time.

Therefore, with DFS being a cyclical stock that’s highly dependent on a positive external environment in order to deliver profit growth, its risk/reward ratio appears to be somewhat unappealing. As such, it seems to be a stock to watch rather than buy right now.

Consumer confidence

The risk/reward ratio for Tesco (LSE: TSCO) however, indicates that it’s a very strong buy at the present time. Like DFS it’s highly dependent on the changes taking place in the UK economy, with consumers enjoying a period of relief following a long six years-plus period of experiencing a fall in disposable incomes in real terms. Now though, Tesco is set to benefit from higher consumer confidence at just the right time.

That’s because Tesco is implementing a new strategy which, while not without risk, has the potential to transform its offering and deliver exactly what its customers want. That means high levels of customer service, product choice and convenience. With Tesco’s earnings due to rise by 78% this year, its price-to-earnings growth (PEG) ratio of 0.2 indicates that the potential rewards outweigh the risks for long-term investors.

Turnaround plan

Similarly, Morrisons (LSE: MRW) is embarking on its very own turnaround plan and is seeking to go back to its core offering of good quality, local produce at reasonable prices. In essence, Morrisons wants to outmanoeuvre the likes of Aldi and Lidl. It seeks to offer a no-frills-but-good-quality service and this has the potential to resonate well with customers. Allied to this is an efficiency programme that should help to shore up Morrisons’ margins too.

Looking ahead, Morrisons is forecast to post a rise in its earnings of 22% this year. Combined with a P/E ratio of 15.2, this indicates good value for money. While it may take time for the market to warm to Morrisons’ shares after its hugely disappointing recent period, buyers are currently offered a favourable risk/reward ratio for the long term. And in the meantime a yield of 3.3% should keep total returns ticking over.

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Peter Stephens owns shares of Morrisons and Tesco. 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.