The supermarkets aren’t what you’d call in favour at present. Amid fears of a price war, sparked by pronouncements from Morrisons after its dismal full-year results, shares in all the leading supermarkets are down.
Elsewhere on the site I’ve written about why I don’t like Morrisons as an investment. Having lagged so far behind its rivals, the whole idea of a price war smacks of desperation.
Today I’ll instead be looking at J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) and Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), two grocers I believe are undeserving of their crushed share price, and offer solid prospects.
J Sainsbury’s nine-year streak of quarterly sales growth may have just come to an end, but departing chief executive Justin King has managed to increase market share, and he is handing the business to his successor in good shape.
Tesco, on the other hand, is the market leader — a retail giant with a strong balance sheet and one of the most most reliable dividends in the FTSE 100.
Valued
Shares in J Sainsbury and Tesco are down 11% and 13% respectively this year. Now, one thing you need to remember is that there’s no reason to follow the herd. Just because a tipster in the newspaper proclaims either company is a “SELL!” doesn’t mean it’s an opinion worth a fresh organic carrot. (More on this later.)
If you listen to Warren Buffett talk about markets, he disputes whether they even exist. Rather a market is simply “American business” (UK business, in our case, obviously).
Let’s take a look at little look at the businesses of the two grocers:
Tesco
| 2009 | 2010 | 2011 | 2012 | 20013 | |
|---|---|---|---|---|---|
| Dividend | 10.9p | 11.96p | 13.05p | 14.06p | 14.76p |
| Profit | £2.9bn | £3.2bn | £3.6bn | £4.0bn | £2bn |
Sainsbury’s
| 2009 | 20010 | 2011 | 2012 | 2013 | |
|---|---|---|---|---|---|
| Dividend | 13.02p | 14.02p | 15.10p | 16.10p | 16.10p |
| Profit | £519m | £610m | £665m | £712m | £756m |
What we have are two solid blue-chips. Now, in the event of a price war, I’d unreservedly back Tesco to win the fight. Its market position is the most dominant and, with the highest profit margins in the sector, it stands the best chance to win back unhappy customers with better deals than anyone else.
The profitability of J Sainsbury, on the other hand, could come under threat. It has the lowest margins in the sector and, as such, cutting prices isn’t really an option.
But the fact is, if you’re investing in a company — that is, owning part of a business to help you retire comfortably, pay your children’s tuition, or any other reason — the best chance of success is to hold it for the long-haul. There are exceptions, and even the best investor makes mistakes, but the intention should always be the same: to invest in great businesses that will produce returns above and beyond inflation, savings accounts, bonds, gold or any other asset, and increase your wealth.
With that in mind you could look at J Sainsbury’s and Tesco’s fall in share price like a discount. Same as you would 11%-off a new television, or 13%-off a car. The difference is, if earnings increase in the grocery firms in the next five years, so too should the share price. I don’t believe the looming price war will have a material impact on the long-term prospects of either company.
