Could Metcash Limited shares be a better bet than Woolworths Limited?

Metcash Limited (ASX:MTS) and Woolworths Limited (ASX:WOW) are both struggling from intense competitive pressure.

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As the ASX heads towards the end of calendar year 2015, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) looks set to finish the 12 months slightly lower than where it started.

For two of Australia's largest grocers however, their one year performance is set to be even worse than the index.

Grocery wholesaler and supplier to IGA-banner supermarkets Metcash Limited (ASX: MTS) is currently down around 14% year to date.

Meanwhile, Australia's largest retailer and leading supermarket operator Woolworths Limited (ASX: WOW) has experienced a 22% decline in its share price.

While both stocks have significantly underperformed in 2015, the longer-term underperformance of Metcash is stark.

Since the beginning of 2011 the share price of Metcash has crashed around 60%; the share price of Woolworths is down just over 10%; and the index has climbed about 8%.

This enormous decline in the share price of Metcash could potentially have created an opportunity for value-seeking investors to acquire the business at an attractive price.

While Woolworths is most certainly the higher quality business and enjoys "blue chip" status, right now Metcash's shares could be offering investors more upside potential.

Last week Metcash released its interim results for the six months ending October 31. According to broker Commsec, the results came in ahead of expectations with the group reporting an underlying net profit after tax of $87 million which equated to 9.4 cents per share.

In comparison, in the prior corresponding period the company reported a profit of $92.5 million and earnings per share (EPS) of 10.3 cents.

Metcash also announced a $100 million cost-out program to support future earnings. When coupled with the results this suggests the earnings decline may be coming to an end with a new baseline being formed. This scenario would also appear to be the view of analysts with consensus data (provided by Morningstar) showing an increase in EPS in financial years 2017 and 2018.

With Metcash's share price at $1.59, the stock is trading on a forward price to earnings (PE) multiple of less than 9x. In contrast, despite the pull back in Woolworths' shares, the giant still trades on a forward PE of around 17 times.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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