Should I Buy Tesco or Wm. Morrison Supermarkets?http://www.fool.com/investing/general/2013/04/25/should-i-buy-tesco-or-wm-morrison-supermarkets.aspx Roland Head
April 25, 2013
LONDON -- The U.K.'s supermarket chains have become popular investments with income and value seekers in recent years, thanks to their modest valuations and attractive dividend yields.
However, although these retail giants are attractive investments, they aren't without their own challenges, so in this article I am going to compare Tesco (LSE: TSCO) (NASDAQOTH: TSCDY) and Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY) to see which looks the better buy today.
Tesco vs. Morrisons
Tesco's P/E ratio of 21.1 reflects the restructuring costs and impairments it has accounted for in this year's results. Excluding these, and focusing on Tesco's preferred measure of underlying profit from continuing operations, Tesco has a trailing P/E of 10.1, almost the same as Morrisons'.
The companies' operating margins also tell an interesting story. If you look in Tesco's results, it claims an overall trading margin of 5.3%, which is almost identical to Morrisons'.
However, Tesco prefers to report its trading margin excluding the accounting cost of its Clubcard loyalty program, which was 572 million pounds last year. Once you factor this cost in, Tesco's operating margin falls to just 3.4%, which shows how its generous use of discount vouchers is having a significant impact on its profitability.
Analysts' forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis and tend to deliver fewer surprises than smaller companies.