What have the UK’s Supermarkets got to resist the resurgence of Asda?

The UK’s supermarkets continue to provide both thrill and fear in equal measure this year. We recently looked at Tesco (TSCO) and how it compared to sector peers J Sainsbury (SBRY) and WM Morrison (MRW) on a fundamental and technical/charting basis. Now, it appears we need to add a bit of good old fashioned news to the equation.

The news of interest is Wal-Mart CEO David Cheesewright having divulged how disappointed he was with Asda’s recent performance, voicing his intent to invest heavily in price at the US retail mega-giant’s UK subsidiary. What ‘investing in price’ means (and it’s a term you’ll hear often in the retail sector) is lowering prices. That in turn signifies that the hitherto fearsome price war between the grocers is far from over. In fact, it looks set to intensify.

Somewhat counterintuitively, in the 22 weeks to 22 May, sales at Asda were down 5% while those at Tesco, Sainsbury’s and Morrison’s were down 1%, 1.2% and 2.1% respectively, yet shares in the UK’s blue chip supermarkets took a major turn for the worse on Friday 3 June. Why? Because investors buy into the outlook, not for past performance.

Investors reacted to Cheesewright’s aggressive rhetoric by selling shares in the UK’s big three listed grocers en-masse, spooked at the prospect of a second round for the price war. But what if that selling was overdone? Where there’s panic and blood, it’s often a sign that oversold conditions may not be far off.

In terms of products, Asda is already one of the UK’s cheapest supermarkets. How can it possibly sell its wares for less and still protect margins? And if it’s the cheapest, then why is it also the worst performing of the UK’s ‘big four’? Is there a correlation to be had here?

Is Cheesewright’s strategic shift from protecting profits to protecting market share set to damage parent firm Walmart in the US, a bit like Saudi Arabia’s attempts with OiI? Surely the investment in price approach is based upon a Strong Walmart financing it, which in turn depends on continued confidence in US economic strength. Well, one only has to look at the last US Jobs Report and what that said about the prospect of a summer US rate hike to see that things may not be as good as we thought they were. That surely affects Walmart’s outlook – which is the thing investors are interested in.

Will Sainsury’s, Tesco and WM Morrison hold their ground against a weaker Asda? Indeed, what will the UK’s market leaders come back with to reassure shareholders? Sainsbury’s latest update already suggests it is set to adopt a much simpler pricing strategy after customer feedback on complicated promotions.

After a nigh on 3% (knee jerk?) sell-off across the board, could now represent a good time to buy the UK supermarkets? If so, which offers the best opportunity right now? Have you got your bag-for-life and loyalty card at the ready?

Read on for a look at where the UK’s supermarkets are now, what investors should be looking out for and where the shares might be headed next.

Tesco (TSCO)

Will shares in Tesco fall towards the lows of 137p or rise back towards the highs of 201p?

Tesco is the most robustly valued of the trio, its shares trading at 12-month forward Price/Earnings (P/E) ratio of 24x, 34% higher than the average of the three blue-chips. This could be seen either as a sign of market confidence in continued growth at the company or a sign that Tesco shares are now fully, even over-valued compared to peers. The stock doesn’t currently pay a dividend, yet remains a popular short-term trading play.

There are currently 18 broker ratings out on Tesco, 13 of which have price targets above current levels and the last four of which have been either bullish (buy, outperform) or neutral (hold). As at 6 June, the average 12-month broker target price is seeking 22% upside for Tesco shares.

To be kept fully up to date with the latest news and technical observations on Tesco and the other UK listed retailers, access our full research offering here.

N.B. All pricing and consensus data was sourced from Bloomberg on 6 June. Please contact us for a full rundown.

J Sainsbury (SBRY)

Will shares in J Sainsbury rise back towards the channel ceiling at 295p or fall towards the floor at 227p?

The first thing we note on the SBRY chart is the ominous looking Bearish flag pattern with its potential to see shares return to the floor of their 20-month sideways range. The daily RSI also indicates a little more weakness to come – especially within such a well-defined trading range. That’s a short term, technical outlook for the stock.

Fundamentals may be taken one of two ways, as usual. J Sainsbury has the highest dividend yield (5%) of the big-three blue-chip listed supermarkets, which is a positive for income seeking investors. With shares trading at a decent 36% discount to our average 12-month forward P/E ratio, Sainsbury’s represents a potentially good value play too. Support seems solid around the 225p level.

Brokers are neutral to bullish (read ‘cautious’) on SBRY, yet 9 out of 13 brokers are suggesting upside potential. The average of all targets sits some 11% above current levels. The last ‘Sell’ rating was issued by Goldman Sachs in May.

To find out how you can speculate on falling as well as rising prices, visit our information page here.

N.B. All pricing and consensus data was sourced from Bloomberg on 6 June. Please contact us for a full rundown.

WM Morrison (MRW)

Will shares in WM Morrison fall towards the lows of 140p or rally on towards the channel ceiling at 215p?

The oft-overlooked Morrisons quickly re-entered the UK 100 at the last index re-shuffle, having found itself demoted to the towards the end of 2015. A sterling recovery in share price this year is currently taking a break with shares currently testing the 100-day moving average. This looks to be potential consolidation within a bullish flag pattern ahead of another leg higher and a re-visit of the channel ceiling around 215p. Bulls will no doubt be seeking confirmation that a major reversal is not in play by looking for a break above 200p.

While today MRW’s fundamentals are on a similar par with Tesco, over the next few years it is seen edging back towards our sector average price in terms of P/E ratio.

Brokers are bearish on Morrisons with 52% having issued ‘Sell’ ratings on the stock in 2016. Jefferies sought 10% upside in May with a 210p target price, while the average 12-month target is suggesting 9% downside potential.

N.B. All pricing and consensus data was sourced from Bloomberg on 6 June. Please contact us for a full rundown.

Want to know more?

By the time you read this report the share prices of the UK supermarkets will almost certainly have moved. That’s why it’s so important you have access to the information you need while it’s fresh and ideally before the wider market prices in both news and views. Why not take a look at the most recent price data for our grocery trio – how have the shares moved based on the factors discussed? If you’ve seen something interesting and would like to discuss it, give us a call and speak to one of our friendly team of traders. We’re always delighted to engage in interesting, thought-provoking conversations about both the markets in general and specific companies like the supermarkets.

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