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UBS optimistic on UK supermarkets, 'buys' Tesco, Sainsbury and 'sells' Morrisons

LONDON (ShareCast) - Rather than fighting on price, UBS (NYSEArca: FBGX - news) declared in its 'initiation of coverage' on the European food retail sector after its Evidence Lab undertook a large consumer survey in the UK, "the future is about differentiation". Overall, the earnings outlook for the European food retailers is "better than it was", with price competition set to ease, analysts think, as the grocers "become more rational, and focus on differentiation and price perception".

Furthermore, the space race is slowing, which, combined with some early signs that the discounters are becoming capacity constrained, gives for a particularly positive reading for the UK.

The Swiss bank proceeded to issue a 'buy' rating on Tesco , Sainsbury's and Ocado and France's Carrefour (Swiss: CA.SW - news) , together with and a 'sell' recommendation for Morrisons and Booker in the UK and Germany's Metro .

"Given our positive stance on the UK, we like Tesco (Xetra: 852647 - news) and Sainsbury's, but we think Morrisons needs to invest more than consensus models.

"We think Ocado's unique business model is worth supporting. Carrefour (Paris: FR0000120172 - news) has more recovering to do in France and we think Brazil is under-appreciated." Finally, on the cash and carry subsector, UBS said it worried that Metro (Other OTC: MTRAF - news) 's margin in Russia, at around 10%, is too high, and think market expectations for Booker's earnings are too high as well.