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Would Warren Buffett back this stock reporting 10%+ earnings growth?

The UK’s leading food wholesaler, Booker (LSE: BOK), has released an upbeat set of results for the 24 weeks to 9 September. They show that its strategy is working well, but is Booker the kind of stock that Warren Buffett would invest in?

Booker’s sales increased by 13% versus the same period of the previous year. This was despite continued challenges with tobacco sales. They fell by 5.6% due to the display ban on tobacco products. Booker’s earnings per share increased by 11% as its plan to Focus, Drive and Broaden the business made progress. Its customer satisfaction numbers were strong as it offered improved choice, process and service. This could prove to be key to Booker’s future since the outlook for the UK’s food market is very competitive.

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In this sense, Booker could prove to be of interest to Warren Buffett. He’s focused on companies that offer a competitive advantage over their rivals. Booker’s focus on improving customer satisfaction could allow it to generate higher margins and also provide more stable sales over the medium-to-long term.

Looking ahead, Booker is forecast to increase its earnings by 11% in the current year and by a further 9% next year. However, it trades on a relatively high price-to-earnings (P/E) ratio of 22.7. This indicates that it lacks upward rerating potential. As a value investor, this high price would be likely to dissuade Warren Buffett from purchasing Booker. Therefore, even though its integration of Londis and Budgens is set to positively catalyse its financial performance, Booker lacks appeal right now.

Just buy?

One company that offers significantly better value for money within the food retail sector is Just Eat (LSE: JE). The online takeaway service company is forecast to increase its earnings by 70% in the current year and by a further 49% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.7, which is significantly lower than Booker’s PEG ratio of 2.3.

Just Eat is investing heavily in improving the customer experience so as to develop a competitive advantage over its peers. For example, it has partnered with the likes of Microsoft and Apple to enable online ordering through Xbox and Apple TV, while also developing new technology that provides the most up to date restaurant information and degree of personalisation across the sector. It’s also investing in Orderpad terminals that will be deployed at restaurants to keep customers better informed on the progress of their takeaway order.  

Clearly, the online takeaway space is highly competitive. However, Just Eat’s investment in new technology and in the customer experience should boost customer loyalty. This may provide it with an economic moat. When coupled with a low valuation and the scope to scale up its offering across multiple geographies, it means it may be of interest to value investors such as Warren Buffett.

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Peter Stephens has no position in any shares mentioned. 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.

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