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Investment View: Sainsbury's is the place to shop for a decent return

James Moore
Monday 26 November 2012 20:00 EST
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Sainsbury's. Our view: Buy. Price: 331.8P (-1.8p)

Morrisons. Our view: Sell Price: 260.8P (-0.9p)

As I suggested earlier last week, if there is one part of planet retail you'd want to be on over Christmas it's the supermarkets.

They sell an awful lot more than food at the sort of prices you can only match if you're another supermarket or a serial tax avoider like Amazon.

With money tight, that's the sort of thing that consumers are bound to notice, and it ought to feed through to their sales figures, their earnings, and ultimately their share prices.

But out of the big three UK-listed operators where's it best to put your money?

I'll look at Tesco after its next trading statement, due on 5 December, but we have had updates from both Morrisons and Sainsbury's relatively recently which have provided a picture of how they are doing ahead of what is the most important trading period of the year.

Those updates couldn't have been more different. Sainsbury's prospects seem to be as sunny as Morrisons are murky.

So to the former. Justin King's outfit reported a 1.9 per cent increase in sales from stores open at least a year in the 16 weeks to 29 September, which set the pace for rivals, who are currently struggling to keep up.

The improvement is accelerating. In the first half of its financial year the increase was 1.7 per cent.

The company might still only be Britain's third-largest supermarket chain by market share, but it is gaining ground and seems like the most dynamic at the moment.

Don't underestimate the success of the Paralympic sponsorship – the event massively outstripped expectations in terms of public interest. Channel Four even hurriedly relegated its flagship soap, Hollyoaks, to one of its digital channels so it could clear the decks for TV coverage of the event. Sainsbury's more than got its money worth.

The results were helped by booming, own-brand sales, the Taste the Difference Range, and the relentless march of its convenience stores. The company should have a care. My colleague, Simon English, recently highlighted the impact of one of its planned openings on a local shop near where he lives in these pages. As he pointed out, while the public seems to have fallen back in love with Sainsbury's it could just as easily fall out again if it starts to be perceived as a bully.

The other challenge facing Sainsbury's is to improve profitability. These are last year's figures, but its 3.9 per cent operating margin is way behind Morrisons (5.5 per cent) and Tesco (6.2 per cent but that will fall as it tries to revive its UK stores). Of course, it does control less of its freeholds. Will it have the flexibility to fight back if its rivals chose to attack on price? We'll see.

That said, it now trades on a very fair 11 times earnings for the year to 31 March, with a healthy, prospective yield of 5 per cent.

Keep buying while the sun shines on it.

Morrisons is in a different place. It's on a lower multiple (9.5 times full year to end January) but also offers a lower yield (4.6 per cent). That might not matter so much were it growing quickly, except that at the moment it's not.

Morrisons is losing market share to its rivals, reversing the previous trend under Marc Bolland, who drove it forward during its salad days before heading to M&S. He's found the going tougher. Perhaps he and successor Dalton Philips could console each other with a drink at the Capital Club.

Mr Philips has tried to expand the group's reputation for fresh food and wants to develop online and convenience.

I last looked at Morrisons when the shares were hovering at around 290p at the end of January. The advice was to take profits. That has been justified.

Morrisons in a muddle. I'd want evidence that it's getting itself out before investing.

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