J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) has reported a 2.1% fall in like-for-like sales during the first half of this year.
The supermarket expects sales to fall by a similar amount during the second half of the year, as price-cutting and smaller customer baskets take their toll.
However, the question for investors is whether there is worse to come: although Sainsbury’s share price has been dragged down by sector weakness this year, it has outperformed peers Tesco and Wm. Morrison Supermarkets by a considerable margin over the last five years:
|
Supermarket |
5-year price change |
|
Tesco |
-53% |
|
Morrisons |
-42% |
|
Sainsbury |
-26% |
Skeletons in closets?
Sainsbury’s new chief executive Mike Coupe was adamant this morning that there are no underlying problems at the supermarket.
In particular, Mr Coupe was keen to avoid any suggestion of Tesco-style accounting problems — in a conference call with analysts, he said that the company was “100% confident” that its promotional income was correctly accounted for.
However, Mr Coupe was not so reassuring when the subject of Sainsbury’s dividend came up, telling analysts on the call that the firm’s dividend policy would be part of its strategic review, the results of which will be made public when the firm publishes its interim results on 12 November.
A bargain buy?
Dividend aside, there are several reasons to think that Sainsbury could be a compelling buy for value investors.
1. Assets: Sainsbury’s £7.1bn portfolio of freehold and long leasehold properties provides solid backing for the supermarket’s net tangible asset value per share of 299p — 24% higher than the current share price of 240p.
2. Earnings: Sainsbury’s shares currently trade on just 7.3 times last year’s earnings, and on 8.6 times 2014 forecast earnings. Even if this year’s earnings fall 15% below current estimates, Sainsbury’s shares would still only be on a P/E of 10.
3. Debt: Sainsbury has far less debt than either Tesco or Morrison. The supermarket’s net gearing is just 39%, compared to more than 50% at both of its peers.
For value investors, the combination of cheaply-rated profits, a strong balance sheet and good asset backing could be irresistible: Sainsbury is on my own watch list and I’m seriously considering a buy.
However, it’s important to remember that things really could get much worse: Sainsbury’s already has lower profit margins than Tesco or Morrisons, and if sales continue to fall — and the dividend is cut — the firm’s shares could get cheaper still.