Valuation
One thing both Tesco Corporation (USA) (NASDAQ:TESO) and Wm. Morrison Supermarkets plc (LON:MRW) do have in common, though, is an undemanding valuation. Both companies are valued at roughly 11 times their earning power and offer prospective dividend yields of more than 4%. By comparison, the shares of many high-quality consumer brand companies currently trade anywhere between 17 and 25 times their normalized earnings.
Neither Wm. Morrison Supermarkets plc (LON:MRW) nor Tesco is priced for above-inflation growth. But for two different reasons, I believe both companies have opportunities to grow, which the market is underestimating. For Wm. Morrison Supermarkets plc (LON:MRW), it is the low-hanging fruit of expansion into express stores, online retailing, and more shops in the south of England. For Tesco Corporation (USA) (NASDAQ:TESO), it is the continued expansion into new high-growth international markets and retail banking. I believe both companies will also enjoy greater per-store profitability in the U.K. as cyclical consumer spending recovers.
Successful growth is far from guaranteed in either case, of course, but the inexpensive valuations provide some margin for failure. Meanwhile, success relies on relatively modest, visible assumptions of expansion, founded on impressive track records.
The bottom line
There’s a risk that buying both Wm. Morrison Supermarkets plc (LON:MRW) and Tesco Corporation (USA) (NASDAQ:TESO) could overexpose your portfolio to the U.K. groceries market. In my view, the modest valuations and defensive industry characteristics mitigate this to an extent. Neither company is likely to disappear overnight.
I think Wm. Morrison Supermarkets plc (LON:MRW) and Tesco are sufficiently different in service, size, and geographical mix to coexist in the same portfolio. While their future growth may come from different sources, I believe investing in both Wm. Morrison Supermarkets plc (LON:MRW) and Tesco Corporation (USA) (NASDAQ:TESO) will provide satisfactory long-term business results.
For these reasons, I’m strongly considering an investment in both companies this summer.
Don’t take my word for it
Fortunately, I’m not the only one who sees Tesco Corporation (USA) (NASDAQ:TESO) as an ideal investment for the long term. In fact, I’m in very good company — with the richest investor in the world!
The article Tesco vs. Wm. Morrison Supermarkets? Why Not Own Both? originally appeared on Fool.com.
Mark Rogers has no position in any stocks mentioned. The Motley Fool recommends Tesco. The Motley Fool owns shares of Tesco.
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