The Motley Fool

Lloyds Banking Group plc vs J Sainsbury plc vs Royal Mail plc: which value stock should you buy?

Footsie giants Lloyds (LSE: LLOY), Sainsbury’s (LSE: SBRY) and Royal Mail (LSE: RMG) have their fair share of challenges looking ahead.

But some would say these troubles are baked into each firms’ share price.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

For 2017 Lloyds deals on a P/E ratio of 9.8 times; Sainsbury’s carries a reading of 13.2 times for the current year; and Royal Mail changes hands on a multiple of 10.2 times. By comparison the broader FTSE 100 forward average stands at a far-chunkier 15 times.

Don’t horse around

That is not to say investors should jump in, of course. After all, worsening trading conditions can see broker forecasts receive scything downgrades, putting ‘cheap’ P/E ratios to the sword in an instant.

Besides, the prospect of prolonged bottom-line woe can see low earnings multiples creep steadily higher.

Lloyds, for example, is expected to follow a 3% earnings slip in 2017 with a 4% drop in 2018, pushing its P/E ratio for next year above 10 times forward earnings. Readings below this level are associated with stocks threatened with severe and/or extended profits weakness, just like the Black Horse bank.

And many analysts indeed expect earnings at Lloyds to remain on the back foot next year and beyond. Not only does the bank face increasing revenues pressure as Brexit negotiations exacerbate economic cooling — in 2017 and beyond — but this backdrop also raises the prospect of bad loans stepping higher.

Till troubles

Supermarket colossus Sainsbury’s also faces an upward climb as new kids on the block Aldi and Lidl force the chain into ever-bloodier price war, the pressure exacerbated by their ambitious expansion schemes. And rising costs on the back of sterling’s slide is adding a double whammy to the poor profits outlook over at Sainsbury’s.

Like Lloyds, the number-crunchers expect earnings to retrace beyond this year, too — an anticipated 16% drop in the period to March 2017 will be followed with a 4% drop in fiscal 2018, according to latest forecasts.

And this latter reading pushes the P/E ratio to an even-worse 13.7 times for next year. I wouldn’t consider entertaining Sainsbury’s at the current time, particularly as medium-term earnings multiples soar above the ‘high risk watermark’ of 10 times.

Package powerhouse

On first look it could be said that Royal Mail could also be considered a poor growth pick, particularly as its P/E ratio falls outside this bargain benchmark of 10 times for the next few years.

Brexit is already causing havoc over at the country’s oldest courier, Royal Mail reporting a 2% revenues slip for its UK parcels and letters division during April-December due to increased business uncertainty. The City expects these troubles to create earnings dips of 3% and 1% in the years to March 2017 and 2018 respectively.

But unlike Lloyds and Sainsbury’s, I reckon Royal Mail’s long-term earnings outlook is much sunnier than its peers. The parcels giant can look to its continental GLS division to generate revenues growth should problems persist in its home market. And while the letters market is in terminal decline, I expect parcels traffic to keep surging as the internet shopping phenomenon continues, pushing earnings resoundingly higher in the years ahead.

I reckon Royal Mail is a terrific growth selection for patient investors, and especially at current prices.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Royston Wild has no position in any shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.