Can the red-hot Tesco share price continue to outshine Sainsbury’s?

The Tesco (LSE: TSCO) share price has given rival FTSE 100 grocer Sainsbury’s (LSE: SBRY) a regular beating. The UK’s biggest grocer is up 28% over 12 months and a blazing 92% over five years.

Second-placed Sainsbury’s has served up solid fayre, climbing 10% over the last year and 59% over five. That just pips the FTSE 100 average, which rose 55% in that time. Sainsbury’s is solid but Tesco is stronger. It’s hard not to taste the difference.

That’s backed up by Deutsche Bank’s latest take. On 29 July, it initiated coverage of both supermarkets, rating Tesco a Buy and Sainsbury’s a Hold. Its analysts called Tesco better positioned to handle sector pressures, helped by its scale, cash flow, and efficiency. Tesco Clubcard got a mention too, thanks to its long-term monetisation potential.

FTSE 100 standoff

Deutsche said that Sainsbury’s refocus on food was helping, but lower margins, a less efficient workforce and exposure to cyclical risks via Argos could hold it back.

Tesco’s Q1 trading update on 12 June showed why it’s the market leader. Like-for-like group sales jumped 4.6% to £16.38bn. Online sales surged 11.5%. UK market share rose 44 basis points to 28%, marking 24 straight periods of share gains.

Brand perception improved too, showing customers were responding to Tesco’s push on quality, value, and service. Chief executive Ken Murphy credited all three for the strong quarter.

On 1 July, Sainsbury’s fought back with a 4.7% lift in like-for-like Q1 sales, with strong trading across food, clothing, and Argos. CEO Simon Roberts hailed 30 consecutive periods of primary customer growth, and said it was growing faster than rivals.

While both are gaining ground, Tesco seems to be doing it more profitably. Sainsbury’s warned recent rises in employer National Insurance and minimum wage costs would add around £140m in extra costs this year. It’s trimming spending where it can – closing cafés and streamlining operations – but expects flat annual profit of around £1bn.

Valuation gaps

There’s a valuation gap here too. Sainsbury’s trades at a trailing price-to-earnings ratio of 13.1. Tesco looks pricier at 15.3, but as the clear market leader with greater long-term potential, I think that’s justified.

Tesco also dwarfs Sainsbury’s by size, with a market cap of £27.5bn versus £6.8bn. That scale gives it an edge when negotiating with suppliers and investing in things like advertising and tech. Sainsbury’s, though, might benefit from being nimbler.

What next for investors?

Analyst forecasts show muted expectations for both. Tesco’s median one-year price target sits at 423p, roughly where the stock trades now. Still, 12 of the 15 analysts covering it rate it a Strong Buy, with three more saying Buy. Nobody says Sell.

Sainsbury’s median target is 305p, also close to today’s price. Only four analysts call it a Strong Buy, while six say Hold. Again, no sellers.

Both supermarkets have had a good run. Risks remain, from the enduring cost-of-living squeeze to fierce pricing competition, especially from Asda and Aldi. The new tax burden on employers won’t help either. There’s always a chance of weaker consumer demand if inflation rears up again.

For those considering adding a supermarket to their portfolio, it might make sense to hedge bets by considering both. But if I had to choose one, I’d still go for Tesco. It’s still number one.

The post Can the red-hot Tesco share price continue to outshine Sainsbury’s? appeared first on The Motley Fool UK.

More reading

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. 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.