It's been a trifecta of underperformance for Australia's three major supermarket chains compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past 12 months. While the index has gained 11%, Woolworths Limited (ASX: WOW) has risen just 8.4%, Wesfarmers Ltd (ASX: WES) has added only 7.6%, and Metcash Limited (ASX: MTS) has sunk 26.6%.
The relative performance of each of these stocks over the past year is interesting, but what really matters is their future earnings outlook. While all stocks probably deserve a place on your watchlist, do any of them deserve a place in your portfolio at present?
Woolworths
As the largest and most profitable retailer in Australia the blue-chip appeal of Woolworths is obvious. Some investors remain wary of the firm's move into hardware – it's a fair point and certainly something which needs to be monitored. However with further earnings growth forecast and a fully franked dividend yield of 3.8% there are plenty of reasons to like the stock.
The sticking point here is the price. Trading on a multiple of 18.5, the shares appear to be at a very full price to pay despite the quality.
Wesfarmers
As the owner of Coles – which it has made vast improvements to since acquiring – plus ownership of Bunnings, Kmart, Target and Officeworks, Wesfarmers is as worthy of the quality tag as Woolworths when it comes to retailing. That is where the similarities stop however as Wesfarmers' business model is vastly different to Woolworths.
As a conglomerate, a shareholding in Wesfarmers exposes an investor to many other industries including fertilisers and coal. However here in (arguably) lies the opportunity. A weak coal price has dramatically reduced divisional earnings, and if the coal price improves then Wesfarmers' earnings will too.
With the stock yielding a fully franked dividend of 4.5% and trading on a PE of nearly 20, now could be a reasonable time to buy, if firstly, the coal price improves and secondly, if the board acts cleverly with the company's large cash balance.
Metcash
Shareholders in wholesaler Metcash certainly haven't enjoyed the same level of performance as shareholders in its two peers. This can largely be explained by its completely different business model which has faced its own set of unique pressures.
With the share price languishing at a decade low and the stock trading on a forecast PE and yield of 12.9 and 4.7% respectively, the risk-reward scenario is starting to look appealing. It might be safer for investors to stay on the sidelines for the time being, but if conditions start to improve for Metcash then there could be upside in the stock price.
