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A FTSE 100 investment trap I’d sell to buy this blue-chip retail star

These are dangerous times for Morrisons (LSE: MRW) and its shareholders.

The supermarket’s share price has slumped 30% over the past 12 months yet it’s still the most expensive of its FTSE 100 sector rivals. It trades on a forward P/E ratio of 13.6 times, compared with corresponding readings of 12.8 times for Tesco and 9.6 times over at Sainsbury’s.

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Morrisons has been the stronger performer of the ‘Big Four’ grocery giants of late and this explains its higher rating. Like-for-like sales here rose 2.3% in the three-and-a-bit months to May 5, dwarfing the 0.8% rise Tesco posted in its own first fiscal quarter and vastly outperforming Sainsbury’s where sales continued to sink. I’m sure that the grocer’s decision to expand its online accord with Amazon has given its rating a shot in the arm too.

In the mire

Conventional thinking suggests that Morrisons remains pretty good value despite its more expensive rating versus those of its rivals. I would argue, though, that all three Footsie firms should be trading below the bargain-basement watermark of 10 times that’s indicative of shares with high risk profiles. And this is why I’m so concerned for the supermarket’s investors.

Let’s make no bones about it: Britain’s supermarkets are in full-on cannibal mode and there are likely to be quite a few casualties. Every one of these major businesses has ramped up in the fast-growing premium segment in recent years, as has their spending in the budget segment in response to the charge of Aldi and Lidl.

At the same time, the booming online marketplace is turning into a shark tank as existing operators bolster their service and new entrants vie for a slice of the cake. For Morrisons, this is a particular problem, given that footfall continues to crumble at its megastores and it lacks any sort of exposure to that other rapidly-expanding market category: convenience retailing.

Fashion star

There’s plenty of reason to be pessimistic about Morrisons and its share price, then. So why buy or even hang on to the stock when there are much better FTSE 100 retailers to buy? Right now, I have Associated British Foods (LSE: ABF) in mind, a business in great shape to succeed thanks to its flourishing Primark arm.

The budget clothing division may have been trading in Britain for close to half a century, but its presence on foreign boulevards is a much more recent phenomenon, ABF opening its first overseas store in Madrid in 2006. And it’s rapid expansion abroad that makes me convinced the returns here should surpass those of Morrisons and its peers in the years ahead.

Economic conditions in its UK and European markets may be toughening, but Primark’s low-cost clothes mean that it’s gaining share and thus keeping sales on an upward slant (these rose 4% in the 10 months to June 22). Irrespective of how it performs in the near term, however, I am confident that the future is extremely bright for this British retail success story. This is why I consider it to be a snip, despite its slightly-plump forward P/E multiple of 17.4 times.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Associated British Foods and 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.

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