There is still some good money to be made from investing in UK supermarket groups, according to Berenberg.
The venerable German investment bank understands fears of a “bloated market”, given that Tesco PLC (LON:TSCO), J Sainsbury PLC (LON:SBRY) and Morrison PLC (LON:MRW) have all seen their share price soar over the past year.
But analysts, who remain sector bulls, reckon there are three key reasons why the strong run can carry on for a while yet.
Online less of a threat to supermarkets
First up, is that price competition “is now normalising” after several years of price wars cut margins down to the bare bones, meaning supermarkets have been better able to pass on higher costs to customers.
Second, the threat of online is less of an issue for supermarkets, with families still generally preferring to venture in-store rather than order online.
According to Berenberg’s number crunchers, most people who could be swayed to do their shopping over the internet already do so, meaning cannibalisation isn’t as much of an issue for the UK grocers as it is for, say, clothes retailers.
High street struggles a boon
Coupled with that, Amazon is yet to really do anything in the food space despite it being two years since it bought Whole Foods.
Lastly, high street retailers, which are now giving up some of their market share which for years they had pinched away from supermarkets.
Berenberg now calls the likes of Poundland, M&S Food and 99p Stores “share donors”, almost fully offsetting the headwinds brought about by the rise of discounters Aldi and Lidl.
Those are the general growth drivers, but analysts also point to some company-specific reasons to be optimistic.
Strong H2s expected
Berenberg thinks Tesco, its top pick in the sector, should continue to benefit from “strong growth” in its Booker division, while Sainsbury’s should continue to improve heading into the second half, boosted by “peaking Argos synergies”.
As for Morrisons, analysts hiked their price target to 250p from 210p as they forecast a 9% rise in underlying earnings in the second half of the year, compared with 4% in the first.
The investment bank still has Morrisons as a ‘hold’, while it has ‘buy’ recommendations on Tesco and Sainsbury’s, with target prices of 295p and 369p respectively.