Can you think of any shares which have been as beaten down as Tesco (LSE: TSCO) and Morrisons (LSE: MRW)?
Most of the attention has been on Tesco, but the whole supermarket sector seems to have been in freefall recently. If you are a long-suffering shareholder in Tesco, should you sell Tesco and buy Morrisons? Well, let’s look at each supermarket in turn.
Tesco
I think Sir Terry Leahy was very perceptive when he said that Tesco was right at the centre of UK retail, and that this could be an advantage or a disadvantage. Lately it has been seen as a disadvantage.
Tesco has been very worried about what it is not, rather than what it is. It has worried about the discounters such as Aldi and Lidl, and tried to match their offers and product ranges. It has also worried about the high end such as Waitrose and Marks & Spencer, and tried to match their premium ranges.
But Tesco used to offer such a high standard and variety of products at such a reasonable price, and with such convenience, that none of the other supermarkets could match it. And it communicated this well to its customers. The centre was the place to be. Instead of Tesco worrying about its competitors, its rivals were worrying about Tesco.
As Tesco has tried to recover its falling market share, its profit margins have been decimated, and its share price has fallen sharply. Yet there are some positive signs; a P/E ratio of 10.3, with a dividend yield of 2.3%, looks reasonable. Dave Lewis has shown strong leadership, and if sales and margins recover, so will the share price.
Morrisons
As Tesco’s share price has fallen, so has Morrisons’. Partly this is because Tesco’s woes have affected the whole industry. But Morrisons has had difficulties of its own.
Of all the supermarkets, Morrisons’ market share has fallen the most quickly. Morrisons has suffered as the supermarket price war has raged. What’s more, an increasing proportion of supermarket sales are now made at convenience stores and online – both areas of weakness for Morrisons.
Yet Morrisons is now investing in convenience stores and its internet offer, and is competing more fiercely on price. It’s turnaround is more advanced than Tesco, but it is difficult to say whether its market share will now recover. The valuation is similar to Tesco, with a P/E ratio of 11.6, but the dividend yield is higher, at 7.8%.
Foolish summary
Overall, I find little to choose between these businesses: both are losing market share and profitability in a highly competitive environment. But both are working there way through turnarounds, and are likely to recover profitability.
If I were a Tesco shareholder, I think there is a reasonable chance that the share price will recover. Personally, I think the shares are a hold.