Merryn's Blog

Why Sainsbury is still a better bet than Tesco

Even though Tesco has just turned in some pretty reasonable results, we still prefer its smaller rival Sainsbury. Here's why.

It's good to know that at least the nation's favourite grocer isn't going up in smoke. But although Tesco has just turned in some reasonable figures, we still prefer one of its rivals.

First the good news. "Only 1% of [Tesco's] goods arrive by air mainly vegetables and flowers", says boss Sir Terry Leahy. So at least the supply chain for Britain's biggest retailer isn't being blitzed by Icelandic volcano ash.

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But other parts of today's preliminary figures proved to be slightly less reassuring. 'Underlying' pre-tax profits rose by 10% to an expected £3.4bn, but contained a bigger-than-forecast boost from property deals. This meant that the trading surplus generated by the firm's stores proved a bit below par.

And while overall sales (ex-fuel) rose almost 7%, and group debt was nicely down, there were worries about "prolonged weakness" in the States, as the US Fresh and Easy chain made a £165m loss.

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Meanwhile, analysts noted a sharp slowdown in UK sales growth towards the end of the financial year, and also that the group didn't give figures for recent weeks as it did last year.

All in all, a rather mixed bag. "A decent outcome [but with] caveats", says Nick Bubb at Arden Partners.

The shares fell 1% in the news, which means they're up 1% this year compared with the near 7% rise in 2010 that's been rung up by smaller rival J Sainsbury (LSE: SBRY).

We suggested investors should switch into Sainsbury from Tesco back in January, and we still prefer it for three reasons.

First, while it's on a similar p/e multiple (around 12), Sainsbury pays a prospective dividend yield of 4.4% compared with Tesco's 3.2%.

Second, measured by price/sales, it stands on half its larger rival's ratio (0.31 v 0.6 for Tesco the lower the figure, the cheaper the stock). Meanwhile the price/book comparison is strongly in favour of Sainsbury, too.

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And third, just 15% of analysts who cover the stock rate Sainsbury as a 'buy', according to Bloomberg. That compares with a bullish rating for Tesco of over 50%.

I'd still be happy to go against the consensus flow and to keep holding shares in Sainsbury.

And for a more high-octane way to play the grocery sector, see: Profit by playing Sainsbury off against Tesco

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