Investors in J Sainsbury (LSE: SBRY) should be pleased. Shares in the firm have risen by 11% so far this year, thanks to upgraded profit guidance in September.
There have been no such treats for shareholders of Tesco, whose shares have fallen by 7% in 2015, and Morrison, down 12%.
Latest results
Sainsbury’s interim results, which were published today, provide a mixed picture. Like-for-like sales fell by 1.6% during the first half of the year, while underlying per-tax profit was 18% lower than during the same period last year, at £308m.
The market seems to have taken a dim view of these results, and Sainsbury’s shares are down by 3.7% as I write. However, I think this reaction may be a little overdone.
The main reason Sainsbury shares have outperformed this year is that in September, the firm told investors that underlying pre-tax profit would be “moderately ahead” of the consensus forecast of £548m. The shares popped higher and have held onto those gains since then.
Today’s first-half profit figure of £308m suggests to me that a full-year figure of more than £548m is a pretty safe assumption. Christmas is on the horizon, after all.
For me, Sainsbury remains the pick of the UK supermarkets, for three important reasons.
1. Margins
The ongoing supermarket price war is putting pressure on all the big supermarkets’ profit margins.
Sainsbury’s underlying operating margin fell by 0.4% to 2.7% during the first half of the year, compared to the same period last year. That’s not great news, but it needs to be looked at in context.
Tesco’s adjusted operating margin was just 1.3% during the first half of the current year. Morrison’s was 2.0%. For the time being, Sainsbury is the most profitable of the big three.
2. Valuation
Sainsbury shares looks very reasonably priced. They also trade at a big discount to those of Tesco and Morrison. I’m not sure why this is, as Sainsbury is the only firm that doesn’t need to deliver a major turnaround and doesn’t have too much debt.
|
2015/16 |
Sainsbury |
Tesco |
Morrison |
|
Forecast P/E |
12.4 |
34.9 |
17.0 |
|
Forecast yield |
3.9% |
0% |
3.2% |
|
Price/book ratio |
0.82 |
2.3 |
1.05 |
As you can see, Sainsbury is significantly cheaper on every measure. In my view this discount could be a good buying opportunity.
Sainsbury also has the advantage of having much less debt. The group’s net debt has fallen from £2,343m to £1,857m so far this year, giving net gearing of just 29%. That compares very favourably to Morrison (56%) and Tesco (164%).
3. Gaining momentum?
The final reason I’m attracted to Sainsbury is that the firm’s earnings forecasts have been creeping higher over the last couple of months. Earnings per share forecasts for the current year have risen by 0.5p since September, while forecasts for next year are up by 0.7p per share to 21.5p.
Although broker forecasts are not always reliable, a gradual increase in the consensus forecast is often a sign that earnings are likely to rise. I expect Sainsbury to have a decent Christmas period, as many shoppers upgrade some of their purchases for the festive season. This is especially true for shoppers in the middle income bracket targeted by Sainsbury.
Sainsbury remains a buy, in my view.