As the markets crashed, FTSE 100 supermarket shares have done relatively well. Food stockpiling delivered significant boosts to revenues and helped drive stock prices higher. Since the coronavirus pandemic started in the UK, fears of a recession have increased. Shares in food retailers tend to outperform when the economy sours, as food is something that doesn’t get cut back much as budgets are squeezed.
Given that a recession is coming, including a defensive stock – like one of the food retailers – in a portfolio makes sense, but the question is, which one?
Shopping around
There are three bricks-and-mortar food retailers in the FTSE 100: WM Morrisons Supermarkets, Tesco, and J Sainsbury. Completing the set is Ocado, a wholly online supermarket.
To help in deciding which of the investments might be the best we can score the companies on size, profitability, return, credit profile, growth, and dividends. For each metric, four points will be awarded for the best, three for the runner up, and so on. The average, across all metrics, will be used to find the final ranking, with the highest score being the winner.
Market cap and total sales will stand in as measures of size and strength for the four companies. We will measure profitability with gross, operating, and net profit margins. Three criteria were selected to judge returns on investment: return on invested capital, return on equity, and return on assets.
The balance sheet strength of the four food retailers will be assessed by their current ratios, and also a total debt to total equity ratio. Finally, earnings per share and revenue growth, and trailing 12-month dividend yield will be measured.
Supermarket sweep
Looking at the table below, Ocado stands out. It has a large market cap relative to its sales. In terms of gross margin, Ocado is well above its peers, but it has negative operating, net profit margins, and return measures. But Ocado is growing revenues significantly faster than its peers, and investing heavily to expand its business.
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Perhaps Ocado should not be compared to the bricks-and-mortar retailers as it is a much younger company and wholly online. However, Tesco, Morrison, and Sainsbury have significant online delivery businesses and compete with Ocado for online shopping baskets.
Overall, Tesco has the highest average score of 3, followed by Morrison on 2.6, Sainsbury on 2.3, and Ocado on 2. So based on this ranking system, Tesco would be my pick of the FTSE 100 food retailers.
Food for thought
To check the consistency of the rankings, we can look at how brokers view these stocks. Brokers issue buy, outperform, hold, underperform, and sell recommendations. As of May 7, 81% of broker recommendations for Tesco were either buy or outperform. Sainsbury and Morrison had 50% of broker recommendations coming in as buy or outperform, with Ocado sitting lower with a 37% backing.
So, the brokers and our ranking system are both tipping Tesco as the top FTSE 100 supermarket stock.
