Supermarket shares: Should you buy Tesco, Sainsbury's or Morrisons?

From Tesco's recovery to the peak trading test of Argos shops in Sainsbury's, there's plenty riding on updates from the big food retailers in the coming days.

Sales in festive week can be double normal levels, but the Christmas frenzy is more than just about the battle for the estimated £4.2 billion we spent on food and booze in the immediate run up to the big day.

Grocers have the perfect stage to set out their credentials to shoppers for the year ahead in relation to price, offer, availability and service standards.

That's why disappointing updates from any of the big three listed chains, particularly if they've failed to stem the flow of downtrading to Aldi and Lidl, will have the potential to make or break investor sentiment across 2018.

But analysts at UBS reckon Tesco, Sainsbury's, Morrisons and Asda will have done a pretty good job trying to minimise reasons for shoppers to switch.

In a note previewing next week's trading updates, they have 'buy' recommendations for Tesco and Sainsbury's and a 'neutral' stance on Morrisons, which reflects challenging comparatives for the Bradford-based chain.

All three are expected to have grown like-for-like sales over Christmas, with Tesco's UK & Ireland trading forecast to be up 2.4%, Sainsbury's ahead 1.4% and Morrisons 1.9% stronger.

With Christmas Day falling on a Monday, there should have been opportunity for additional volume growth as shoppers used the pre-Christmas weekend for extra entertaining.

On price, checks by UBS showed Aldi and Lidl selling fresh whole large turkeys at £3.89/kg, with Asda at parity, Tesco and Morrisons at £4 and Sainsbury's at £4.69.

Under the revival overseen by chief executive Dave Lewis, Tesco has continued to reinforce its position as volume leader amongst the Big Four chains, resulting in 11 quarters of growth.

The concern for investors when Tesco reports figures on 11 January will be whether efforts to boost footfall have come at the expense of margins. Activity in the run-up to Christmas included 25% off six bottles of wine and a 3 for 2 promotion on toys.

However, UBS thinks the update is likely to show more solid momentum. It has a 'buy' rating and target price of 270p on the chain, which was recently buoyed by competition clearance for its takeover of wholesaler Booker.

The 2016 acquisition of Argos has made Sainsbury's a more seasonal and cyclical business, with virtually all of Argos's profit thought to accrue in the third quarter of the financial year.

Sainsbury's will have had about 165 Argos stores trading at its supermarkets over Christmas, offering the potential for the shop-in-shops to drive footfall.

Following disappointing like-for-like sales growth of 0.6% in the second quarter of the year, UBS analysts think there's likely to have been some rebound to 1.4% in the following period.

However, it warns that grocery sales have been erratic in recent months, while Argos is up against tough comparatives for its Black Friday and Christmas trading period.

UBS has a 'buy' recommendation and a price target of 325p, adding: "We continue to see risk-reward as attractively skewed." Sainsbury's reports figures on 10 January.

At Morrisons, UBS warns that the chain will have to contend with the toughest year-on-year comparisons of the four largest supermarkets when it reports on 9 January.

UBS is still looking for Christmas like-for-like sales growth of 1.9%, but analyst Daniel Ekstein is worried that volume momentum appears to be stalling.

He said: "Morrisons has been able to outperform expectations on like-for-like sales for much of the past two or three years, driven by range enhancements and improving basics such as service and availability.

"Whilst further range enhancements are ongoing and efficiencies are expected from the sales-based ordering system, it seems some of the low-hanging fruit in terms of self-help has now been captured."

UBS has a price target of 240p and neutral recommendation.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.