As my colleague Cliff D’Arcy highlighted last month, the last six months have seen a solid 30% growth in the Sainsbury’s (LSE: SNBY) share price. Partly due to the Covid-19 pandemic forcing people to eat more at home, the recent boost in price is also because of sentiment towards the sector linked to an attempted takeover of rival Morrisons. With the stock currently trading at just over 300p, is now a good time for me to buy shares in the UK’S second-largest supermarket chain? Let’s take a look.
Sainsbury’s results
As I mentioned above, the pandemic has played a massive role in the Sainsbury’s rise – and this was seen in its recent results. Total retail sales were up 7.3%, and digital sales rose by a staggering 102%. These sales now equate to 42% of total sales. The supermarket giant also acquired Argos back in 2016, whose sales grew over 10% for the year. Regardless of the fact stores are now open again without restrictions, I still think that many people will continue with online shopping as it is a convenient way to shop. This provides me with confidence when investing in Sainsbury’s. A continuation of this sort of performance is likely to lead to a rise in the Sainsbury’s share price.
Takeover news
Private equity firms have been on a shopping spree in the UK recently, with supermarket chains being targeted. The very speculative news of a potential takeover approach last month by US firm Apollo saw a 15% rise in the Sainsbury’s share price, while competitor Morrisons is the centre of attention from bids by private equity firms CD&R and Fortress. As it was decided this week that the final decision will be decided via auction, could it be that the loser eyes Sainsbury’s as an alternative? The supermarket certainly is an attractive buy, with strong recent performances and nearly 16% market share in the UK. A takeover would boost the Sainsbury’s share price.
What does concern me about Sainsbury’s is the level of competition I expect it to face in the future. Cheaper alternatives such as Aldi and Lidl continue to gain in popularity, and this could be a major issue. The German discounter has also begun to venture into the world of online shopping, starting with a click and collect service. This could threaten the Sainsbury’s online business, which was an important factor in its impressive results. Aldi has also been expanding its number of physical stores, with a target of 1,200 by 2025. A loss of market share could see the price of Sainsbury’s stock plummet.
Should I buy?
The most convincing factor for me to buy is the fact I see the chain as a viable acquisition target for a private equity firm. A takeover of this kind would see a large boost in the price of the stock. What does concern me, however, is competition. Market disruptors such as Aldi could pose a huge threat in the future. For this reason, I am going to avoid adding shares to my portfolio for now.