Life as an investor in Sainsbury’s (LSE: SBRY) is rather tough at the moment. The supermarket is doing all it can to improve its sales and profitability but, with such challenging trading conditions, it seems as though it is running fast just to stand still.
Looking ahead, things do not appear to be all set to get better in the short run. The likes of Aldi and Lidl are now intent on moving into previously unchartered territory of central London, with the discount, no-frills operators targeting the mid to upper price point clientele with their brand of low cost/high quality products.
As a result of this increased competition across the UK, the outlook for Sainsbury’s bottom line is rather downbeat. For example, it is forecast to post a 19% fall in its net profit in the current year, with a further 1% decline due for next year. Neither of these figures seem likely to positively catalyse investor sentiment in the stock which, on the face of it, could mean further share price falls.
However, where Sainsbury’s has real potential is with regard to its long term prospects. Although we are now out of the credit crunch, consumers have still not shaken off the fear which was present for a prolonged period. This was at least partly due to wages rising by less than inflation for a sustained period, and meant that price became a much more important factor for them in their shopping decisions.
And, while disposable incomes are now rising in real terms, this situation has only been present for a number of months. In other words, it will take time for shoppers to begin to focus on things other than price, such as quality, convenience and customer service. As such, Sainsbury’s could still post impressive earnings growth over the medium term as the market begins to finally turn in its favour and shoppers return to mid-price point operators.
In addition, Sainsbury’s shares are very cheap at the present time. They trade on a price to earnings (P/E) ratio of only 10.7 (taking into account the forecast fall in its earnings) and a price to book value (P/B) ratio of just 0.81. Both of these figures indicate that Sainsbury’s provides upward rerating potential over the medium to long term.
Meanwhile, sector peers such as Greggs (LSE: GRG) and Booker (LSE: BOK) may offer far better earnings growth prospects in the near term, but their valuations appear to already price in such impressive levels of performance. For example, Greggs trades on a P/E ratio of 21 and, while its bottom line is expected to rise by 7% next year, this equates to a price to earnings growth (PEG) ratio of 2.9, which indicates that the company’s share price gains could be limited.
Similarly, Booker is due to continue its double-digit earnings growth figures of recent years by posting a rise in its bottom line of 11% next year. While impressive and providing evidence that the company’s strategy is paying off after a disappointing year in 2013, Booker trades on a P/E ratio of 24.8, which indicates that there is little scope for a rating rise in the medium term.
Furthermore, while meat and food-to-go retailer Crawshaw Group (LSE: CRAW) has released a very encouraging trading update today, the company lacks valuation appeal of Sainsbury’s. Certainly, its share price performance this year has been superb, with it rising by 29% year-to-date (including a 9% gain today). And, its performance for the full-year is now expected to be better than previous expectations. But, it trades on a P/B ratio of around 2.5 and has a historic P/E ratio of 55. Therefore, while the company is progressing well, Sainsbury’s appears to have more appeal on valuation grounds.