Retail supermarkets have gained massive popularity since first showing up in the mid-nineteenth century and have slowly transitioned from small stores into large shopping malls. Nowadays, they are an ever-present part of everyday life all over the world. For any investor, getting to invest in retail supermarkets especially the big ones can be a very profitable venture. Not all supermarkets are open to investing by the public however; some are under private ownership and aren’t therefore listed on stock exchanges and for the common investor this makes their stocks nearly inaccessible.
Aldi is the best example of a supermarket that a majority of investors wish they could jump onto but just can’t. Aldi leads globally as a discount supermarket chain having nearly 10,000 stores in over 18 countries and a turnover estimated to be over €50bn. It is based in Germany and was founded in 1946 by Theo Albrecht and his brother Karl after taking over a store previously owned by their mother in Essen, the store had been operational since 1913.
Today, Aldi is one of the largest companies that are privately owned in the world.
Alternatives to Aldi: Tesco and WM Morrison
This year so far, WM Morrison supermarkets (LSE: MRW) and Tesco (LSE: TSCO) are the two risers topping in the FTSE 350.
Each of these two major retailers has started the year off with trading updates which are better than expected. So, should you keep on buying or is disappointment lying ahead?
Investing in Tesco
What is Tesco?
Tesco PLC is an international British grocery and a retailer for general merchandise having its headquarters in Welwyn Garden City, Hertfordshire, England. When measured using profits, Tesco is the third largest retailer worldwide and when using revenues it’s the second largest worldwide. Its stores are located in 12 countries across Europe and Asia and it’s the leading grocery market in UK (it roughly has a 28.4% market share), Hungary, Ireland, Thailand and Malaysia.
Jack Cohen founded Tesco in 1919 as a group of market stalls. The first time that the name Tesco first appeared was in 1924 after Jack Cohen bought a tea shipment from T.E Stockwell and he then combined the initials with his surname’s first two letters, Tesco’s first store was opened in Burnt Oak, Barnet in 1929. Cohen’s business rapidly expanded and he had more than 100 stores all over the country in 1939.
Originally a United Kingdom grocery retailer, Tesco has since early 1990s undergone diversification geographically and into other areas such as telecoms, software, petrol, financial services, toys, furniture, electronics, clothing and internet services. The 1990s saw the repositioning of Tesco by moving itself from the down market high volume and low cost retailer that it was to one having an appeal across a number of social groups by getting to offer products that ranged from “Tesco Value” items which were launched in 1993 to its range of its “Tesco Finest”. This expansion of its appeal was successful and it saw the growth of the chain from the 500 stores it had in mid 1990s up to 2,500 stores in the 15 years that came next.
Tesco is a FTSE 100 index constituent and is listed on the London Stock Exchange. As of 22 April 2015, Tesco’s approximate market capitalization was £18.1 billion which is 28th largest of any company having a London Stock Exchange primary listing.
Should you invest in Tesco?
During the festive season, the largest supermarket in the UK reported a rise of 1.3% in like for like sales in the UK which defied the City having an expectation of a fall of 2% in UK sales.
Does this mean that the time is right for buying into a Tesco recovery? The current valuation of Tesco seems quite attractive for the long run. The trading is also expected to improve plus a stabilisation of the profit margins. So Tesco can be rated as a long term buy for value and income.
There sure isn’t any rush though. Current trading of the shares is on a P/E forecast of 18 for 2016/17. Already, a level of recovery that is fair seems priced on the stock and the net debt of £10bn Tesco has remain a huge concern.
It is also wise holding off making any decision until the investigations into the accounting scandal at Tesco get completed.
Investing in Morrisons
What is Morrisons?
In the UK, Morrisons comes fourth in the group of largest chain of supermarkets, it has its headquarters in Bradford, West Yorkshire, England. It started as stall for egg and butter in Rawson Market, Bradford, England. The store locations of Morrisons had primary focus in northern England until 2004 when its south England, Scotland and Wales presence significantly increased following the Safeway takeover. As of May 2014 Morrisons owned 515 superstores plus 113 Morrisons M stores which are spread all over England, Scotland and Wales.
10% of the company is currently owned by the Morrison family. The company is part of the FTSE Index of companies and is listed on the London Stock Exchange.
Should you invest in Morrisons?
Morrisons was the first among supermarkets to give report after Christmas. The group surprised the market with a rise of 0.2% in the like for like sales which had initially been expected to fall.
Morrisons unlike Tesco has ownership of the freehold for most of its stores. For the shares currently trading on a 1.25 book value price, this provides asset backing that is very valuable.
The strong cash flow seen means the net debt that Morrisons has is falling faster than previously expected. The firm’s year end figure guidance is at £1.65bn up to £1.8bn which from the last financial year this is down from £2.3bn. Strong cash generation also implies that a decent dividend will be offered out by the group. The forecast yield currently is 3.2%.
As a final bonus, the attractive cash flow and big property portfolio Morrisons has may make it attractive to private equity bidders. Morrisons can therefore be rated as worth buying.