J Sainsbury (LSE: SBRY) is our best supermarket investment right now, I reckon.
The days when they could all whack high margins on their products and play the premium retailer part are gone, and we’re firmly back to a Lidl-led era of lower prices (and thinner rewards for shareholders), and we just have to get used to it.
But there is some upmarket middle-ground left, and it has traditionally been Sainsbury’s turf — and I can see it staying that way.
Earnings fall this year
We are looking at forecasts for a 16% fall in earnings per share (EPS) for the year to March 2015, but Sainsbury’s does have to take its fair share of the punishment — targeting a more upmarket demographic does not make it immune to competition or avoid the need for more price competitiveness.
First-half results due on Wednesday 12 November should put some flesh on the bones of today’s forecasts, and at the beginning of October we did hear that Sainsbury’s saw ex-fuel like-for-like retail sales slip 2.8% in the second quarter, and down 2.1% over the half.
The “deflationary environment” is certainly hitting, and Sainsbury’s response is to price-match on brands with Asda — but that still leaves room for higher-margin brands not carried by Asda, and for non-branded products like fresh meat and vegetables.
More awards
And set against the squeeze, Sainsbury’s keeps on winning awards — at the end of September it picked up five more at the Retail Industry Awards, and also added the “In-store bakery of the year” title at the Bakery Industry Awards to its collection.
Things like that count in the battle to attract the better-heeled shopper, and I think Sainsbury’s will be able to pull ahead of the sector over the next couple of years. We already have a smaller EPS fall on the cards for March 2016, of 7%. And forecast dividends are still high at more than 5% and covered around twice by earnings — there’s enough leeway there for a dividend cut while still remaining ahead of the competition.
Oversold?
To top it off, with the price having dropped 40% in the past 12 months to 241p, the shares are on forward P/E ratios of under 10 for the next two years, which I don’t see as stretching even in these tough times.
But first things first, and hopefully nothing disappointing next Wednesday.