LONDON (Reuters) - Investors are finding it increasingly hard to put a price on shares of Britain's supermarkets, as a fierce price war and an accounting scandal at Tesco (>> Tesco PLC) undermine any attempt at forecasting profits.

Shares of Tesco, Sainsbury (>> J Sainsbury plc) and Morrisons (>> Wm. Morrison Supermarkets plc) have fallen 40 to 50 percent over the past year, but stock pickers don't find the three UK grocers unequivocally cheap.

    Any analysis is blurred by uncertainty over how far profits may fall and dividends be cut as the sector undergoes a deep structural change. Competition from hard-discount rivals Aldi and Lidl and online retailers such as Ocado (>> Ocado Group PLC) is growing, changing the landscape around them.

Britain's grocery market grew at its slowest in more than 20 years over the 12 weeks to Sept. 14, as price inflation fell to zero, reflecting price cuts, according to data from market researcher Kantar Worldpanel. Sales at market leader Tesco fell 4.5 percent, cutting its market share to 28.8 percent from 30.2 percent in the same period last year.

    Billionaire investor Warren Buffett, who famously said he buys when other investors are fearful, weighed in on Tesco on Thursday: he called his investment in the supermarket "a huge mistake".

    The sector's fall from grace has been accompanied by collapsing share prices, management changes and, recently, accounting irregularities that poked a hole in Tesco's balance sheet. It has drawn comparisons to the state of UK banks after the financial crisis erupted in 2007.

"This is an industry that is clearly fragmenting" as competition grows, said Andrew King, head of European equities at BNP Paribas Investment Partners, which manages assets worth 497 billion euros (392.26 billion pounds). "The earnings base on which you want to ascribe a valuation to Tesco and other players is pretty difficult to determine."   

Historically, shares in non-financial companies are valued using metrics such as the ratio between their share price and expected earnings, or forward P/E multiple, and their dividend yield, which compares the size of the most recent payout with the stock's price.

Tesco's shares trade at 9 times their expected earnings for the next 12 months. That is a 25 percent discount to their historical average and 50 percent discount to the European food and beverage sector, Thomson Reuters Datastream showed.

Sainsbury's dividend yield is 7.5 percent, meaning that even if it halved its payout it would still offer nearly 4 percent yield at current prices, in line with the market's average.

The magnitude of the ructions in the UK retail industry, however, means that those stocks are not necessarily screaming "buy" opportunities at this level, investors said.

Market leader Tesco, which in the past has served as a basis for valuing smaller competitors, is likely to undergo the biggest transformation, with many expecting price cuts. No. 2 Sainsbury has announced a comprehensive review of its business, including its generous dividend.

"I don't think we can trust the multiples quite yet, in that we don't yet know the extent of their strategic response to the challenges and maybe the complete alteration of consumer preferences," Andrew Parry, chief executive officer at Hermes Sourcecap, which manages assets worth $3.3 billion.

"Once we know who the winners and losers are, then you can start looking at bottom fishing."

TAKING PAIN

The extent of any dividend cut is often seen as the single most important criterion for whether to hold the shares, which have usually been bought by investors looking for reliable earnings and payout.

"I'm holding on to Sainsbury and I'm taking a lot of pain," said Jeremy Le Sueur, managing director of wealth management firm 4-Shires. "If Sainsbury cut the dividend, which I do not expect them to do, by more than 35 percent, I would review the portfolios where I hold it for income clients."

The UK retail sector was starting to attract some contrarian buyers, however.

Billionaire Mike Ashley's sporting goods retailer, Sports Direct (>> Sports Direct International Plc) took out an option bet that Tesco shares will not fall. It also increased its stake in Britain's second-biggest department store company, Debenhams (>> Debenhams Plc).

Nick Kirrage, UK Income Fund Manager at Schroders, has been adding to his positions in Tesco, Sainsbury and Morrison's as their price fell.

"Some of these businesses, I believe, are discounting (profit) falls of 40 percent in perpetuity," Kirrage said.

"We're going to see a very substantial collapse in profit but what I don’t think we're going to see is that collapse be maintained for the next 10 years."

(Reporting By Francesco Canepa; Editing by Larry King)

By Francesco Canepa