Swept away

I certainly don’t when I look at the J Sainsbury (LSE: SBRY) share price, which is trading almost 20% lower than it was back then. The last year has been particularly brutal, with the stock down a third, as investors fled following the failed £7.3bn takeover of Asda. They’re creeping back this morning, although I wouldn’t crack open the bubbly just yet.

The FTSE 100 group’s stock is trading almost 2% higher after reporting “increased grocery momentum as we create one multi-brand, multi-channel business.” That shows how low investor expectations have fallen, given today’s numbers included a hefty 15% drop in underlying profit before tax to £238m for the 28 weeks to 21 September.

Management blamed the £41m reduction on “the combined impact of the phasing of cost savings, higher marketing costs and tough weather comparatives,” and said it was in line with guidance. Like-for-like sales (excluding fuel) fell 1%, while group sales were down 0.2% to £16.86bn.

Heavy weather

Sainsbury’s also reviewed its store estate, which led to £203m of one-off costs across the half, and was the main reason statutory profit before tax fell from £107m to just £9m.

CEO Mike Coupe hailed lowered prices on everyday food and groceries, a new range of value brands, significantly improved customer satisfaction and continued investment in hundreds of Sainsbury’s and Argos stores. He also cautioned that “retail markets remain highly competitive and the consumer outlook remains uncertain,” but said second-half profits should benefit from the annualisation of last year’s colleague wage increase, a normalisation of marketing costs, and weather comparatives.

It isn’t disastrous, but it does continue the theme of slow decline as the German discounters Aldi and Lidl expand and consumers retrench. Some investors would buy and hold Sainsbury’s forever for the yield, which is currently 5.1%, covered 1.9 times by earnings.

A forecast valuation of 10.3 times earnings may also tempt. However, earnings are forecast to fall this year and next, and operating margins are wafer-thin at 1.1%, although expected to climb to 2%.

Wholesale turnaround

This is a tough sector. Just look at FTSE 100 rival Morrisons (LSE: MRW), which is down 20% this year, although it’s up 27% measured over five years. Management is gamely testing out new ways to grow the business, targeting £1bn of wholesale revenues, expanding online via Amazon, and extending its convenience store network.

This is having a positive effect, with City analysts forecasting a 29% jump in earnings per share this year, and 7% next (compared to drops of 8% and 3% at Sainsbury’s). The Morrisons share price is more expensive as a result, trading at 14.7 times forecast earnings, albeit with a lower dividend of 3.5%, also covered 1.9 times. Again, operating margins of 2.3% are wafer-thin.

I feel a well-balanced portfolio ought to have some space for the big supermarkets, but I’m wary of recommending companies with such vast, sprawling operations that end up working to such fine margins. You might find other more convincing income plays out there.

The post Got £2,000 to invest in an ISA? Then I’d take a look at these 2 FTSE 100 dividend stocks appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Chain reaction 

This remains a sector under siege, primarily from German discounters Aldi and Lidl, but also from the impact of falling real-term wages on shoppers’ pockets and, of course, Brexit. Yet the big guns have battled on despite wafer-thin margins, sporadic price wars, changing shopping habits, online competition, and falling market share.

The Sainsbury’s share price is up 17% in the last year, against a near-10% drop on the FTSE 100 over the same period. Morrisons has done well too, rising 7% over the past 12 months, an impressive performance given troubles elsewhere.

This growth comes despite both being hit hard in recent turbulence, falling around 10% in the last month, which some may see as a buying opportunity.

Ringing tills

Supermarkets are entering the vital Christmas trading period and are in need of a seasonal lift, as the latest report from Kantar Worldpanel shows them growing at the slowest rate since March 2017, as they get caught up in the general retail gloom.

Grocery sales in the 12 weeks to 2 December slowed to 2%, down from 2.6%, 3.2%, and 3.8% in the past three updates. Colder weather was partly to blame (the hot World Cup summer now a distant memory) with sales at Sainsbury’s falling 0.2%, with predictable consequences for its share price. There was better news for Morrisons, which grew 0.5%, despite a strong comparative last year.

Festive fun

Christmas is coming and the good news is that Kantar reckons we are set for a record-breaking festive season with spending to hit £10bn over December. Mintel reckons spending will rise 4% this December compared to last year, with food sales predicted to rise 3.3% to £18.6bn. Although more shopping will be done online, non-food retailers will bear the brunt of this.

Sainsbury’s has seen its market share fall from 16.3% to 15.8% over the last year, although Peter Stephens remains a fan. But again, Morrisons did better. Its market share dipped only slightly, from 15.3% to 15.1%. With the group posting 25 consecutive periods of growth, now could be a good time to buy.

Asda price

Investors in Sainsbury’s face further uncertainty, as we await the Competition & Market Authority’s verdict on the Asda merger. The next stage has been pushed back, possibly into early February, so we will need to be patient. City analysts do expect a small pick-up in the group’s earnings per share, which should grow 1% in 2019, and 3% in 2020. By then, the yield should hit 3.7%, with a valuation of 14 times earnings. These are reasonable numbers, although I can’t get that excited about them.

Morrisons is more expensive, trading at a forecast 15.9 times earnings for 2020, while yielding just 3.1%. However, forecast earnings growth looks much more impressive at 8% and 9% over the next couple of years which, if correct, will continue its recent strong growth record. That’s why I reckon Morrisons tastes better than Sainsbury’s right now.

The post I reckon the Morrisons share price could smash the FTSE 100 and Sainsbury’s in 2019 appeared first on The Twelfth Magpie.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Pure food

E-tailer Ocado Group (LSE: OCDO) calls itself the world’s largest dedicated online grocery with almost 600,000 customers. It has ambitious plans to cash in on the booming market for Britons to do their weekly shop online, which is set to make up 9% of the £179bn grocery market by 2021, up from 6% today.

Its rapid share price growth reflects this opportunity, with the stock soaring 206% over the past five years. This figure is rather flattering, as it masks three years of decline dating from 2013, but the recovery is under way, with the stock up 25% in the last six months. Some have been excited by talk of a mooted tie-up with Marks & Spencer, although this is far from settled at the moment.

A bit pricey

Ocado has certainly been motoring, boosted by existing supplier relationships with Waitrose and Morrisons, with sales up 13.6% last year to £1.267bn and profit before tax and exceptional items up 21.8% to £14.5m. Although debt widened from £127m to £164.9m, the balance sheet remains strong.

The company is no disaster but trading at a whopping 157 times earnings – and forecast to hit 342 times – you would hope that its growth prospects would be stronger. Worryingly, earnings per share (EPS) are forecast to drop 48% in the year to 30 November 2017, although they may rebound 34% the year after. With consumer confidence weak, the economy slowing, and food inflation still relatively high, this stock is way too expensive for me.

More reasons

It now seems a long time since Morrisons (LSE: MRW) suffered what once looked like a terminal meltdown. The stock has been booming lately, its share price up 45% over two years, and 25% over the past 12 months. I would never have guessed.

I certainly didn’t expect such a dramatic rebound as German budget chains Aldi and Lidl continue to make inroads, customer wages continue to stagnate, and sentiment continues to decline. However, management has overhauled the business successfully, driving down costs and using keen pricing to reduce market share losses.

German inroads

Sales in the 12 weeks ending 21 May 2017 rose 1.9%, beating both Tesco at 1.8% and Sainsbury’s at 1.7%, according to latest figures from Kantar Worldpanel. However, Aldi and Lidl’s sales growth was almost 20%, that’s 10 times as high, lifting their joint market share to a record 12%. Morrison saw its market share fall two percentage points to 10.5 points. Hardly disastrous, but the direction of travel is still wrong.

I swept the supermarkets out of my portfolio several years ago and I still see little reason to return to the fray. Perhaps I am being hard on Morrisons, with its EPS forecast to rise an impressive 18% in the year to 31 January 2018, followed by another 6% after that. The dividend is slowly being restored, with a current yield of 2.2% covered twice. However, trading at 22.5 times earnings, this remains a tough play in a tough sector.

The post Two super growth stocks I’d dump today appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.