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Why I would sell the Sainsbury’s share price today and buy Tesco

It’s now five years since I swept the big supermarkets from my investment portfolio as they wilted under sustained attack from German upstarts Aldi and Lidl, and I’ve been reluctant to restore them since.

Off their trolleys

The share price of grocery giants Sainsbury’s (LSE: SBRY) and Tesco (LSE: TSCO) have rattled all over the place in that time, like a supermarket trolley with a busted wheel. While there have been moments of runaway performance, a crash has never been far off.

Long-term performance is poor with Sainsbury’s down 17% over five years, and Tesco down 30%. That’s despite the best – and often impressive – efforts of respective bosses Mike Coupe and Dave Lewis to plot a less erratic course.

Hanging on

The two men merit plenty of praise, as Coupe’s move to introduce Argos to Sainsbury’s stores and Lewis’ decision to hook-up with wholesaler Booker have added a new dimension to both businesses. However, it’s a mark of their travails that a 0.4% drop in total retail sales at Sainsbury’s over the crucial Christmas trading period was seen as not too bad. Investors preferred to accentuate the positives, such as its 6% rise in online sales and the 3% lift in convenience sales.

Tesco enjoyed a buoyant start to the year, rising 18% to 28 January, helped by news of a 2.6% jump in like-for-like festive sales over the six weeks to 6 January. Let’s gloss over the fact that Aldi’s sales grew by a storming 10%, and Lidl’s by 8% over the festive period.

Come on home

I really would like to welcome both of these stocks back into my portfolio, I’m sentimental that way, and they do have certain attractions. Sainsbury’s and Tesco both look reasonably valued with forecast P/E ratios of 13.5 times earnings and 13.10, respectively. Their price-to-sales ratios are splendidly low at just 0.20 and 0.32.

Sainsbury’s offers a halfway decent forecast yield of 3.8% with cover of 1.9, even if that’s below the FTSE 100 average yield of around 4.5%. Tesco has slowly repaired its dividend and now yields a forecast 3.4% with cover of 2.2%, giving scope for further progression.

Head to head

Tesco’s earnings growth has been the more impressive, up 65% in 2017 and 57% in 2018. and this looks set to continue with analysts forecasting 33%, 20% and 12% over the next three years. They’re less optimistic about Sainsbury’s, forecasting just 0%, 2% and 10% over the same timescale. This year, Tesco’s revenues are forecast to grow 7.8%, against just 1.2% for Sainsbury’s.

Apologies if I’ve bombarded you with figures, but these two comparisons suggest to me that if I had to buy just one of these two, it would be Tesco. Its return on capital employed (ROCE) is also higher, at 10.6% against 5.9%.

Analysts have long agonised over Tesco’s wafer-thin operating margins, but at 3.2% they beat the 2.2% Sainsbury’s can deliver. Tesco even has a PEG of 0.6, against 5.9 for Sainsbury’s. The jury is in. Tesco looks the superior buy to me. It could be time to direct my shopping trolley back to the grocery sector and pick up some shares.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.