In light of the recent Christmas trading statements from the supermarkets, and the relatively poor reception to Tesco's statement, I have been keenly watching the share prices should a buying opportunity occur.
I already have a holding in Morrisons and, even though I would be happy topping that up, I have had an eye on Tesco's for the long term (having let one opportunity pass me by last year) so thought I would take a look at some of the "numbers".
To summarise the 6 week Christmas trading:
- Sainsburys achieved 3.6% growth in like for like sales exc. fuel, and increased market share.
- Morrisons achieved 1% growth
- Tesco's had just 0.6% growth
Sainsburys has had the most successful Christmas having managed to cannibalise market share from Asda (unofficial stats) and regain the no. 2 position in the market. In the meantime, its been said that Tesco is under pressure from Sainsburys, Asda, and Morrisons on one side, and Waitrose and M & S on the other and, as a result, a few market watchers appear to have called time on Tesco's growth (which I think is very premature) and tipped Sainsburys as the one with the fastest growing market share.
Its a concern that Tesco's trading statement contained that old chestnut of weather affected sales, a statement that doesn't seem to have been mirrored by its earlier reporting rivals. Rightly or wrongly, my belief is that the vast majority of Tesco's sites are in prime locations and must have been as accessible as any of its rivals.
That being said Tesco did maintain its 30% market share.
A look at Tesco's financial results for 2009 - 10 (2010 - 11 not yet published) shows:
- Tesco's UK sales amounted to £38.5bn, more than Sainsburys and Morrisons combined (£19.96bn and £15.4 bn);
- its margins, at 6% (total group), were higher than Morrisons 5.89% and Sainsburys 3.56%
- Its current asset : current liabilities ratio was better than its rivals
- Net debt is higher (but falling at a rate of knots) and still seems well managed and proportionate to sales and profits
- Subsequently gearing stands at 70% (but falling) compared to 20% and 32% for Morrisons and Sainsburys respectively.
- Morrisons was the most prudent on interest cover (and therefore borrowings) with a figure of 20x. Tesco was 11x and Sainsburys just 7x.
- Cash held by Tesco was a huge £2.8bn compared to Sainsburys £837m and Morrisons £245m.
- Sainsburys came closer to Tesco on operating cashflow at 55.2p per share but still fell short in 2009 - 10 as Tesco achieved 56.9p.
- Historically, Sainsburys has been the most generous at increasing its dividend and at a forecast 4% has the highest prospective yield. But, this is possibly too generous with coverage by earnings of only 1.6 times, whilst both Tesco and Morrisons have their dividend covered more than 2 times.
Key thing for me is the opportunities for growth for each of the groups. The above sales figure for Tesco is just for its UK operations but, the sales figures for the overall Group came in at £56.9bn!
Coming back to the Christmas Trading statement, Tesco achieved sales growth of 7.5% when the whole groups operations are brought together.
Within this are international sales from Europe and Asia (growing by a near 15%), a new "full service" banking operation and an improving (albeit slowly) US division. The company also has a proven database strategy in its clubcard loyalty program and has the strength to test new ventures as shown by its recently launched "cash for gold" trial in 15 stores but supported by mail through each superstore. Along, with electricals, clothing, beauty treatments, and opticians, it seems able to maximise the trust in the Tesco brand (much like Virgin) but with the cost control and focus on cashflow that you would expect from a successful retailer.
Compare this to its rivals opportunities for growth which is largely dependent upon either Tesco slipping up, or cannibalising each others market share. In addition:
- Morrisons has bought some additional Netto stores from Asda, and is considering an online offering
- Sainsburys is entering the takeaway cafe market and looking to beef up its online offering.
As long as Tesco can maintain its 30% market share, let its rivals cannibalise each other.
However, there are a couple of concerns that stand out more than the stagnant UK sales, these being the announcement last year that Sir Terry Leahy, the CEO, is stepping down and the level of gearing at 70%.
- On the succession strategy, it has been announced with plenty of time for his successor (internal promotion) to work alongside Sir Terry and grow into the lead role. Strategy wise there are already a number of significant ventures in place that will provide continuity into the medium term.
- With regard to debt and gearing it could be said that Tesco is more efficiently leveraging its financial strength than its rivals (remember that the intent of the last attempt to buy out Sainsburys was to mortgage its property portfolio to raise funds to invest elsewhere). As long as the debt is wisely invested then all is good. In Tesco's case the investment has been to grow in Europe,the Far East, and the US; and the establishment of a full banking operation (buying out its partner RBS). The debt and the company's gearing appear to be falling at a rate of knots which further suggests the strength of the company's cash flows and the improving position in each of those areas.
The slight downer on the supermarkets at present looks to be a pre-emptive forecast of the impact from international food inflation and the VAT rise. To me this is very clearly a short term view.
In a previous posting (Looking ahead to 2011), I put forward my view that the major supermarkets are possibly one of the few sectors that have been able to absorb or pass on cost increases, which has enabled them to continue to increase profits and dividends throughout the last 5 years (Morrisons one year dip in profits post Safeways didn't stop it increasing its dividend).
There has also been the suggestion of a price war this year. That being the case, for me, there will only be one winner, the one with the most sales, the healthiest cashflows, and the largest pot of cash.....Tesco.
You will no doubt have noticed that I have not discussed Asda in great detail, as it is not quoted in its own right, having been acquired some years ago by the giant Walmart group. But despite early concerns the group have not really grasped the cultural differences between the UK and US and have therefore not been able to translate their US dominance into the UK market (up to now). Also, they are deemed to have suffered the most from a recovering Sainsburys.
So, finally:
- Morrisons. I would not be averse to topping up my holding in Morrisons, the group appears to have finally absorbed the Safeway acquisition and therefore has an opportunity to grow sales as its newer Safeway customer base embrace its traditional fayre. The group continues to be prudent with cash and debts and appears (to me) to have the best opportunity to grow domestic sales but, there is a new externally appointed CEO to embed and the current board structure is still relatively new (in the post Ken Morrison era).
- Sainsburys. I am concerned that the increased sales are being achieved at the expense of profit margins and therefore not sustainable leaving the company the most exposed should a price war erupt. Its foray into takeway cafes is uninspiring (to me) and may just increase costs whilst only resulting in lost sales from its own supermarkets.
The last take-over attempt fell through due to the pension fund deficit (and opposition from the Sainsbury family), and I am not sure that this deficit has been addressed.
In addition, the share price is already showing a premium to Morrisons and Tesco.
- Tesco. 30% UK Market share, an established European and Asian operation that is increasing sales, a stabilising US operation, and a full banking operation in the offing. Significant cash balances, reducing debt and strong cashflows.
I also think that now that the costs of establishing these multiple new ventures has been incurred (and cashflows are overtaking interest and debt repayments) there will still be plenty of opportunity for Tesco to grow and make profits faster than its rivals.
Tesco is the clear choice for me (on almost all grounds) but which portfolio would I put them in (growth or income), and will I be tempted by the current price and rating?
I will keep you informed.
Tesco @ 400p; a forecast P/E ratio of 12.3; and a forecast yield of 3.6%
Please note that the financial data referenced here has been derived from the 2009 - 2010 financial results and do not therefore encompass the latest financial year, 2010 - 2011.
The only data referenced for the latest financial year being the Trading statements for the 6 week Christmas period.
I already have a holding in Morrisons and, even though I would be happy topping that up, I have had an eye on Tesco's for the long term (having let one opportunity pass me by last year) so thought I would take a look at some of the "numbers".
To summarise the 6 week Christmas trading:
- Sainsburys achieved 3.6% growth in like for like sales exc. fuel, and increased market share.
- Morrisons achieved 1% growth
- Tesco's had just 0.6% growth
Sainsburys has had the most successful Christmas having managed to cannibalise market share from Asda (unofficial stats) and regain the no. 2 position in the market. In the meantime, its been said that Tesco is under pressure from Sainsburys, Asda, and Morrisons on one side, and Waitrose and M & S on the other and, as a result, a few market watchers appear to have called time on Tesco's growth (which I think is very premature) and tipped Sainsburys as the one with the fastest growing market share.
Its a concern that Tesco's trading statement contained that old chestnut of weather affected sales, a statement that doesn't seem to have been mirrored by its earlier reporting rivals. Rightly or wrongly, my belief is that the vast majority of Tesco's sites are in prime locations and must have been as accessible as any of its rivals.
That being said Tesco did maintain its 30% market share.
A look at Tesco's financial results for 2009 - 10 (2010 - 11 not yet published) shows:
- Tesco's UK sales amounted to £38.5bn, more than Sainsburys and Morrisons combined (£19.96bn and £15.4 bn);
- its margins, at 6% (total group), were higher than Morrisons 5.89% and Sainsburys 3.56%
- Its current asset : current liabilities ratio was better than its rivals
- Net debt is higher (but falling at a rate of knots) and still seems well managed and proportionate to sales and profits
- Subsequently gearing stands at 70% (but falling) compared to 20% and 32% for Morrisons and Sainsburys respectively.
- Morrisons was the most prudent on interest cover (and therefore borrowings) with a figure of 20x. Tesco was 11x and Sainsburys just 7x.
- Cash held by Tesco was a huge £2.8bn compared to Sainsburys £837m and Morrisons £245m.
- Sainsburys came closer to Tesco on operating cashflow at 55.2p per share but still fell short in 2009 - 10 as Tesco achieved 56.9p.
- Historically, Sainsburys has been the most generous at increasing its dividend and at a forecast 4% has the highest prospective yield. But, this is possibly too generous with coverage by earnings of only 1.6 times, whilst both Tesco and Morrisons have their dividend covered more than 2 times.
Key thing for me is the opportunities for growth for each of the groups. The above sales figure for Tesco is just for its UK operations but, the sales figures for the overall Group came in at £56.9bn!
Coming back to the Christmas Trading statement, Tesco achieved sales growth of 7.5% when the whole groups operations are brought together.
Within this are international sales from Europe and Asia (growing by a near 15%), a new "full service" banking operation and an improving (albeit slowly) US division. The company also has a proven database strategy in its clubcard loyalty program and has the strength to test new ventures as shown by its recently launched "cash for gold" trial in 15 stores but supported by mail through each superstore. Along, with electricals, clothing, beauty treatments, and opticians, it seems able to maximise the trust in the Tesco brand (much like Virgin) but with the cost control and focus on cashflow that you would expect from a successful retailer.
Compare this to its rivals opportunities for growth which is largely dependent upon either Tesco slipping up, or cannibalising each others market share. In addition:
- Morrisons has bought some additional Netto stores from Asda, and is considering an online offering
- Sainsburys is entering the takeaway cafe market and looking to beef up its online offering.
As long as Tesco can maintain its 30% market share, let its rivals cannibalise each other.
However, there are a couple of concerns that stand out more than the stagnant UK sales, these being the announcement last year that Sir Terry Leahy, the CEO, is stepping down and the level of gearing at 70%.
- On the succession strategy, it has been announced with plenty of time for his successor (internal promotion) to work alongside Sir Terry and grow into the lead role. Strategy wise there are already a number of significant ventures in place that will provide continuity into the medium term.
- With regard to debt and gearing it could be said that Tesco is more efficiently leveraging its financial strength than its rivals (remember that the intent of the last attempt to buy out Sainsburys was to mortgage its property portfolio to raise funds to invest elsewhere). As long as the debt is wisely invested then all is good. In Tesco's case the investment has been to grow in Europe,the Far East, and the US; and the establishment of a full banking operation (buying out its partner RBS). The debt and the company's gearing appear to be falling at a rate of knots which further suggests the strength of the company's cash flows and the improving position in each of those areas.
The slight downer on the supermarkets at present looks to be a pre-emptive forecast of the impact from international food inflation and the VAT rise. To me this is very clearly a short term view.
In a previous posting (Looking ahead to 2011), I put forward my view that the major supermarkets are possibly one of the few sectors that have been able to absorb or pass on cost increases, which has enabled them to continue to increase profits and dividends throughout the last 5 years (Morrisons one year dip in profits post Safeways didn't stop it increasing its dividend).
There has also been the suggestion of a price war this year. That being the case, for me, there will only be one winner, the one with the most sales, the healthiest cashflows, and the largest pot of cash.....Tesco.
You will no doubt have noticed that I have not discussed Asda in great detail, as it is not quoted in its own right, having been acquired some years ago by the giant Walmart group. But despite early concerns the group have not really grasped the cultural differences between the UK and US and have therefore not been able to translate their US dominance into the UK market (up to now). Also, they are deemed to have suffered the most from a recovering Sainsburys.
So, finally:
- Morrisons. I would not be averse to topping up my holding in Morrisons, the group appears to have finally absorbed the Safeway acquisition and therefore has an opportunity to grow sales as its newer Safeway customer base embrace its traditional fayre. The group continues to be prudent with cash and debts and appears (to me) to have the best opportunity to grow domestic sales but, there is a new externally appointed CEO to embed and the current board structure is still relatively new (in the post Ken Morrison era).
- Sainsburys. I am concerned that the increased sales are being achieved at the expense of profit margins and therefore not sustainable leaving the company the most exposed should a price war erupt. Its foray into takeway cafes is uninspiring (to me) and may just increase costs whilst only resulting in lost sales from its own supermarkets.
The last take-over attempt fell through due to the pension fund deficit (and opposition from the Sainsbury family), and I am not sure that this deficit has been addressed.
In addition, the share price is already showing a premium to Morrisons and Tesco.
- Tesco. 30% UK Market share, an established European and Asian operation that is increasing sales, a stabilising US operation, and a full banking operation in the offing. Significant cash balances, reducing debt and strong cashflows.
I also think that now that the costs of establishing these multiple new ventures has been incurred (and cashflows are overtaking interest and debt repayments) there will still be plenty of opportunity for Tesco to grow and make profits faster than its rivals.
Tesco is the clear choice for me (on almost all grounds) but which portfolio would I put them in (growth or income), and will I be tempted by the current price and rating?
I will keep you informed.
Tesco @ 400p; a forecast P/E ratio of 12.3; and a forecast yield of 3.6%
Please note that the financial data referenced here has been derived from the 2009 - 2010 financial results and do not therefore encompass the latest financial year, 2010 - 2011.
The only data referenced for the latest financial year being the Trading statements for the 6 week Christmas period.
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→Supermarket Sweep: Tesco; Morrisons; or Sainsburys?
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