There are plenty of cheap FTSE 100 shares for investors like me to choose from today. Severe share weakness over the past six weeks means that many quality blue-chips are trading at knock-down prices.
Tesco (LSE: TSCO) and Royal Mail (LSE: RMG) are two FTSE 100 stocks whose share prices look quite cheap at current levels. But as a long-term investor, which one of these should I consider investing in today?
Tesco weathers the storm
March hasn’t been particularly kind for Tesco and its share price. Britain’s largest retailer has fallen 3% in value in the month to date. Yet this is far better than the declines many other lead index members have suffered in that time.
Tesco’s number-one position in Britain’s food retail industry has helped it weather the worst of the storm. Its mild share price decline reflects the threat of rising product, energy and labour costs to its profits column. But we all need to continue eating despite the implications of the tragedy unfolding in Ukraine. So earnings at Tesco should remain stable compared to many other UK shares.
I’m not so sure of Tesco’s defensive qualities in the current climate, however. The worsening cost of living crisis mean the Footsie firm faces increased danger from discount chains, as latest figures from Kantar show.
Discounters gain momentum
During the 12 weeks to 20 March, Aldi and Lidl were the only two major chains to grow sales year-on-year, Kantar said. In a period, the researcher said the result reflects “the growing impact of inflation”, noting that Aldi hit a new record market share of 8.6%. Lidl, meanwhile, equalled the 6.4% record market share printed in November.
Those increases undoubtedly reflect these discounters’ aggressive store expansion plans. But they also show how the importance of value to shoppers is rising as inflation soars. Kantar also said the proportion of spending on grocers’ own-brand products rose to 50.6% in the 12 weeks, from 49.9% in the same 2021 period.
The pressure on Tesco to keep the margin-smacking price cuts coming to compete with Aldi and Lidl is likely to keep rising. This is unlikely to prove a short-term phenomenon either, as the rush to value by increasingly-savvy shoppers over the past decade illustrates.
A top online operation
Tesco has some significant advantages in its fight against both established and newer rivals. It boasts the best and the largest online grocery channel in the country and continues to invest heavily in this area. It now executes 1.2m deliveries per week and in the last quarter posted its biggest online market share since the pandemic began.
Tesco’s position at the top of the online tree bodes extremely well as digital grocery sales keep rising. Researcher Future Market Insights believes online food sales will grow at an average annual rate of 23% in the 10 years to 2030.
Risk vs reward
Following recent share price weakness, Tesco trades on a forward price-to-earnings (P/E) ratio of 12.7 times. For a business with a market-leading brand and a brilliant online operation this may look like good value.
However, this isn’t a view I share. I worry about Tesco’s ultra-thin margins and that a toxic blend of rising competition and increasing costs could hammer profitability. I’d much rather buy other cheap FTSE 100 shares right now, one of which is Royal Mail.
Is Royal Mail a better buy?
Now Royal Mail, of course, isn’t without its own share of risks. This is a highly-cyclical UK share which could see its letter and parcel traffic slump if Britain’s economy grinds to a halt.
It also faces problems as inflation heads northwards. Not only is it having to pay more to keep its delivery vans and trucks fuelled up, buy the cost of living crisis means it could face increasing demands to raise wages too.
Royal Mail has been involved in frequent tussles with the Communication Workers Union down the years. The body is a constant threat to Royal Mail’s bottom line and a fresh ding-dong could be around the corner. Escalating labour costs and staff walkouts could both be on the table.
The rock-bottom valuation
That said, I believe that Royal Mail’s share price is so cheap that it fully reflects these dangers. Britain’s oldest courier has lost 12% in value so far in March. This leaves it trading on a forward P/E ratio of just 5.8 times.
I like Royal Mail because it’s in one of the box seats to capitalise on the e-commerce revolution. Parcels volumes could slip in the near-term if consumer confidence remains under pressure. But from a long-term perspective, this is a cheap FTSE 100 share with massive growth potential.
Britain is the largest online shopping market in the business. And analysts at Statista expect it to continue growing strongly too. They think e-commerce will account for 38.6% of all UK retail sales by 2025, up from 37.5% last year.
A global giant
Royal Mail is investing heavily in restructuring and technology to maximise this opportunity too. Earlier this month, it switched on another fully-automated parcel machine in Chester that can sort almost 200,000 packages daily.
I also like the steps Royal Mail is making to expand its international Global Logistics Systems (GLS) division. This reduces the company’s reliance on one territory (the UK) to drive profits while giving it exposure to other fast-growing e-commerce markets.
GLS operates 1,500 depots and 70 hubs in more than two-dozen countries across the globe. It concentrates primarily on Europe, although acquisition action in Canada at the end of 2021 has boosted its presence in North America.
The post Tesco vs Royal Mail: which cheap FTSE 100 share should I buy? appeared first on The Motley Fool UK.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.