Today I am explaining why J Sainsbury (LSE: SBRY) could prove to be a classic turnaround star.
A dirt cheap earnings pick
Make no mistake: the crippling effect of intensifying competition on Sainsbury’s sales outlook looks set to keep hammering the bottom line for some time to come.
City brokers expect the business to see earnings slip a calamitous 18% during the 12 months concluding March 2015, to 26.3p per share. A slight pick-up in revenue growth is expected to kick in during fiscal 2016, although earnings are still predicted to fall a further 9% to 23.9p.
Still, for contrarian investors seeking access to the British supermarket space I believe that Sainsbury’s presents the best value for money. For the current financial year the business carries a P/E rating of just 9.8 times prospective earnings, beating corresponding readouts of 11.8 times and 14.8 times for Tesco and Morrisons respectively.
And with the London-based firm also carrying an ultra-low P/E readout of 10.8 times for next year — just above the benchmark of 10 or below which signals exceptional value for money — it could be argued that the company’s travails are already based into the price.
… while dividend yields also blast the competition
Backed up by a robust record of solid earnings expansion, Sainsbury’s has established itself as a firm favourite for those seeking reliable dividend growth. However, this era seems to now be drawing to a close thanks to the assault of the discounters.
Although Sainsbury’s elected to keep the interim dividend on hold at 5p per share earlier this month, it warned that “our dividend for the full year is likely to be lower than last year, given our expected profitability“.
Accordingly the abacus bashers expect the supermarket to cut the total payment an eye-watering 23% this year, to 13.4p per share. And a further 13% reduction is slated in for fiscal 2016, to 11.6p.
However, these projections still create yields comfortably above the 3.4% FTSE 100 average. Indeed, this year’s estimated payout produces a readout of 5%, while 2016’s dividend results in a hefty 4.3% yield.
Hot growth sectors to underpin recovery?
Of course, potential investors should be aware that the barnstorming growth of discount chains Aldi and Lidl is likely to step up a gear or two in coming years as their store roll-out programme gathers pace.
Still, I believe that Sainsbury’s own investment programme in the exciting online and convenience store sub-sectors — allied with its own move into the budget space through its Netto tie-up — could deliver a stunning turnaround for more patient investors.