Booker (LSE: BOK) has released an encouraging update for the second quarter of the year and leads me to ask whether the food wholesaler can repeat its 30% gain of the last three years, or whether consumer sector peer Unilever (LSE: ULVR) is a better buy.
Booker’s sales increased by 15.2% in Q2. This included the contribution of recently acquired convenience store chains Budgens and Londis, both of which have been successfully integrated into the wider company.
The catering and retail sides of Booker’s business performed well in the quarter. Like-for-like (LFL) non tobacco sales grew by 0.9%, although with tobacco sales included the figures were much less impressive. Due to the ban on small stores displaying tobacco products, sales of cigarettes have come under pressure. Booker’s tobacco LFL sales fell by 3.5% in the quarter and contributed to an overall decline of 0.4% versus the same quarter of the previous year.
Looking ahead, Booker is forecast to increase its bottom line by 12% in the current year and by a further 9% next year. These are impressive rates of growth and show that the company’s strategy is working even with the negative effect of declining tobacco sales. Furthermore, its balance sheet remains strong due to its net cash position of £105m. And with Booker’s strategy to broaden its product offering, it looks set to deliver additional top line growth.
However, Booker faces an uncertain future. The UK economy could come under pressure as a result of Brexit and the UK retail outlook in particular is highly volatile. Consumer spending fell in August and further falls are expected over the medium-to-long term. Therefore, Booker’s price-to-earnings (P/E) ratio of 22.8 appears to be rather rich and this means that a gain of 30% may be difficult to achieve.
Clearly, consumer peers such as Unilever also have high ratings. For example, Unilever’s P/E stands at 22.7, but it offers greater diversity and more resilience than Booker. That’s largely because it operates across the globe so that slow sales in one region can be offset by faster growth elsewhere. And with Unilever deriving 60% of its sales from emerging markets, it has a more enticing long-term growth outlook than UK-focused Booker.
Certainly, Unilever’s forecast growth rate over the next two years is behind that of Booker. It’s due to increase earnings by 5% this year and by a further 8% next year. However, Unilever’s risk profile is much lower than that of Booker and this makes its overall risk/reward ratio more appealing for long-term investors.
In addition, Unilever has a forward dividend yield of 3.1% versus 2.7% for Booker. Unilever’s dividend is covered 1.6 times by profit, which is the same as for Booker. Allied to its lower risk profile and greater diversity, this makes Unilever a better income as well as growth and value option. And its shares offer a greater chance of a 30% gain than those of Booker.
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Peter Stephens owns shares of Unilever. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Booker. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.