Despite the recent significant run-ups in the prices of many shares and broad indices in markets around the world, there are still stocks that offer value. We believe one such market is the UK's FTSE 100, which is still down about 14% year-to-date (YTD).
Among FTSE 100 stocks that offer a considerable margin of safety are several food and grocery retail names. Two such stocks are J Sainsbury (LON:SBRY) (OTC:JSAIY) and WM Morrison Supermarkets (LON:MRW) (OTC:MRWSY).
Although the sector may not sound exciting, it has proved to be a defensive one during the pandemic. Most of the UK is still following strict social-distancing measures, a large number of households are likely to spend on food and related items during the holiday season.
In the UK, Sainsbury and Morrisons are household names, along with the two other FTSE 100 supermarket peers—Tesco (LON:TSCO) (OTC:TSCDY) and Ocado (LON:OCDO) (OTC:OCDGF). Therefore, we believe the two groups deserve further due diligence. Let’s take a closer look.
J Sainsbury
London-headquartered J Sainsbury operates in several segments, including retail, financial services and property investment. Yet, it is best known for its supermarket operations, the largest contributor to revenues.
So far in the year, SBRY shares are up about 3%. On Dec. 17, they closed at 227.7p (or $12.40 for US-based stock). The current price supports a dividend yield of about 4.5%.
In early November, the group released a strategy update as well as interim results. Total sales were £14.93 billion (or $20.37 billion), down by 1.1% year-on-year (YoY).
On the other hand, grocery and general merchandise sales increased by 8.2% and 7.4%, respectively. Investors were pleased to see digital sales are up 117%, about 40% of total sales. Underlying profit before tax came at £301 million (or $409 million).
CEO Simon Roberts summed it up this way:
“Investment over years in digital and technology have laid the foundations for us to flex and adapt quickly as customers needed to shop differently. Around 19% of our sales were digital this time last year and nearly 40% of our sales are digital today. While we are working hard to help feed the nation through the pandemic, we have also spent time thinking about how we deliver for our customers and our shareholders over the long term.”
Analysts noted that the retailer aims to focus on cutting costs and increase online sales, especially groceries.
In fact, management announced upcoming changes to the operating structure. For instance, it will close four out of five stand-alone Argos stores, which are catalogue retailers. But there will be a large number of collection points added to Sainsbury’s supermarkets.
The group is also likely to sell its banking arm, where profits have come under pressure due to record-low interest rates.
In November it issued a special dividend of 7.3p (or 9.9 cents) and an additional 3.2p (or 4.3 cents) interim dividend. SBRY stock’s forward P/E and P/S ratios are 11.93 and 0.19, respectively. Although the stock price could be volatile as management implements these plans en-route to a leaner organization, we like the shares around these valuation levels.
WM Morrison Supermarkets
Our next supermarket chain is Bradford-headquartered Morrison, whose history goes back to 1899. It has almost 500 stores across the UK as well as a robust online delivery service.
The group is also in a delivery partnership with the UK operations of Amazon (NASDAQ:AMZN). In many parts of the country, Amazon Prime customers can receive free same-day grocery delivery from Morrison. The rumour mill says that Amazon could eventually invest in or take over Morrison.
Year-to-date, MRW shares are down 8%. On Dec. 17, they closed at 177.3p. ($2.485 for US-based stock). Current dividend yield stands around 3.7%.
In early September, the group announced half-year metrics. Revenue came in at £8.73 billion (or $11.87 billion), down 1.1% YoY.
Management highlighted the adverse effects of the pandemic lockdown on low fuel demand and sales. In fact, total revenue ex-fuel was up 8.8% to £7.55 billion (or $10.27). Analysts noted online order capacity went up fivefold.
The company announced an interim ordinary dividend of 2.04p (or 2.77 cents), up 5.7% from a year ago. However, the decision on a special dividend remained deferred.
MRW stock’s forward P/E and P/S ratios stand at 12.56 and 0.24, respectively. Of the four FTSE 100 member supermarkets, Morrison shares have at times been regarded as the underdog. However, given the partnership with Amazon, we believe the company will be able to create increasing shareholder value in coming quarters.