Can J Sainsbury plc’s Share Price Return To 590p?

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.

Today I’m looking at J Sainsbury (LSE: SBRY) (NYSE: JSAIY.US) to ascertain if its share price can return to 590p.

Initial catalyst

However, first we need to establish what caused Sainsbury’s to hit its high of 590p per share in the first place. It would appear, that like many of the companies peers, Sainsbury’s reached its high back in the pre-crisis market euphoria of 2007. 

That said, Sainsbury’s share price was also buoyed by the company’s impressive earnings growth. Indeed, during 2007, the company drove year-on-year pre-tax profit higher by a staggering 359%. In addition, for the same 2006 to 2007 period, basic earnings per share increased by 405% — extremely impressive.

Still, despite this growth Sainsbury’s 2007 EPS stood at only 19.2p, which placed the company on a P/E of 31 at a share price of 590p. Nonetheless, with EPS growing at 400% during the previous year, investors were right to place a growth premium on the company. 

But can Sainsbury’s return to its former glory?

Six years on and it would appear that Sainsbury’s growth has slowed. However, investors are still placing a growth premium on the company, as Sainsbury’s steals sales and market share from its peers, Tesco and Morrisons. In particular, Sainsbury’s trades at a historic P/E of 12.9, while its peers in the wider food & drug retailers sector trade at an average historic P/E of 12.7.

However, a move back to 590p would mean that Sainsbury’s would be trading at a historic P/E ratio of 19.2, not too taxing, although this would mean that Sainsbury’s would look expensive in comparison to its peers.

Nonetheless, with City analysts predicting EPS growth of nearly 10% for the next two years, Sainsbury’s does deserve a small growth premium over its peers. 

Having said all of that, it would appear that investors are still hesitant to pay too much of a premium for retailers such as Sainsbury’s while economic headwinds persist. What’s more, the food and drug retailers sector remains highly competitive and growth for the major retailers is becoming harder to achieve.  I feel that these two important factors will hold Sainsbury’s back.

Foolish summary

All in all, I would not rule out Sainsbury’s share price returning to 590p in the long-term as the company continues to grow faster than its peers. However, I feel that during the next year or so, Sainsbury’s is going to struggle against the current economic backdrop.

So overall, I believe that Sainsbury’s cannot return to 590p in the short-term.