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Should I buy Tesco shares or Sainsbury?

Image: Tesco

The UK stock market is performing well this year. The FTSE 100 index is up about 15% in the past year. In fact, most of the stocks I reviewed have performed even better than the index. I prefer to invest in good individual stocks that I think can outperform the market. I have compared two leading retail supermarket chains, and I believe Tesco (LSE: TSCO) shares are a better buy for my portfolio.

Tesco and Sainsbury’s financial analysis

Tesco’s fiscal year 2021 (53-week) revenue fell by 0.4% to £57.9bn. However, group sales excluding VAT, fuel, and adjusted to remove the additional trading week, rose 7.1% to £53.4bn. Sainsbury‘s (LSE: SBRY) group revenue fell by 0.3% to £32.3bn. However, retail revenue (which excludes VAT and fuel ) was flat at £28.6bn. So, Tesco fairs better over here. In addition, its marketing strategies, like the Clubcard benefits, are driving growth.

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Tesco’s pre-tax profit fell by 20% to £825m. One was the reasons for the drop was due to Covid-19 costs. Management believes that most of these costs are non-repetitive, and they expect a strong recovery in the profits. Sainsbury reported a pre-tax loss of £261m compared to a pre-tax profit of £255m for the previous year. It incurred Covid-19 costs of £485m. So Tesco is a better choice even here.

Tesco shares are trading at a price-to-earnings ratio (P/E) of 30.72 compared to the five-year average of 50.35. Sainsbury is trading at a P/E ratio of 36.02 when compared to the historical average of 30.69. Tesco is trading at a price-sales (P/S) ratio of 0.39 when compared to the five-year average of 0.32. In comparison, Sainsbury is trading at a P/S ratio of 0.20 when compared to its historical average of 0.21. I believe Tesco has an advantage.

Some of the risks to consider 

Every investment will have some risks. Tesco and Sainsbury are both operating in the highly competitive retail sector. They have have to compete with Marks & Spencer, Morrisons, and Asda. Discount retailers like Aldi and Lidl will also put pressure on their margins. 

More people prefer online purchases. So, companies have to invest in digitalisation, which requires capital investments. This reduces a company’s cash flows and profitability in the near term. This could negatively impact both Tesco and Sainsbury share prices.

Finally, both companies have benefitted from the lockdown as they could operate as essential services. People also had more money to spend on groceries, which they would otherwise spend on leisure. Now with the reopening, that spending could once again be spread across various sectors. This could put a dent in revenue for these companies.

My preference is Tesco shares’

Tesco is a bigger company than Sainsbury. It’s a market leader in the UK grocery industry and has been able to increase its market share. Personally, I visit Tesco more often than Sainsbury to make purchases. Its revenue growth is better and it is also more profitable. So, I prefer Tesco shares to Sainsbury.

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Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons 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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