Is J Sainsbury plc Due A Re-Rating?

There have been persistent rumours of a rights issue at J Sainsbury plc (LON:SBRY).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Sainsbury'sSainsbury’s (LSE: SBRY) has had an unpleasant year. Its share price has almost halved since January and it now sits on a lowly PER of 7.5x.

Its share price has been dragged down alongside Tesco‘s (LSE: TSCO) and Morrisons‘ (LSE: MRW), and it could be argued that negative sentiment regarding the sector as a whole has unfairly hampered Sainsbury’s share price performance.

Yet it could also be argued that the structural headwinds facing UK grocers — think aggressive, well-funded European competition, food price stagnation and protracted price wars — are simply too much for good management alone to make much of a difference over the next year.

The Best Of A Bad Bunch?

Sainsbury’s has arguably been seen as the pick of the UK grocers. It is perceived to have a more upmarket consumer base to its peers, which is better protected from Aldi and Lidl’s current UK market share raid. This sentiment only partially holds up to data.

The latest Kantar Panel findings show that Sainsbury’s share of the market fell by 0.4% to 16.2% during the 12 weeks to 14 September — significantly better than Tesco’s 1.4% slide to 28.8% of the UK market. However Aldi, Lidl, Asda and Waitrose actually grew their market share over the same time-frame, while Morrisons and The Co-operative fell by less. This raises questions concerning the assumption that Sainsbury’s market share is better protected than its rivals.

True, it has a strong presence in the South of England, while the discounters are focusing on northern regions (for now). Management must also be commended for the timely expansion of convenience stores and its online offering, at least by the standards of the industry as a whole. The same can be said of its smart joint venture with Danish discounter Netto, which will see the launch of 15 new Netto stores by the end of 2015.

Rights Issue Rumours

As soon as Morrisons announced its price-cutting strategy in a bid to tempt consumers back from Aldi and Lidl, Sainsbury’s and Tesco had to follow suit. There are consequences to price wars of this nature, however.

Cutting prices often requires a re-basing of earnings forecasts, as consumers initially buy the same amount or even more while actually spending less. The rationale is that word will get out of the supermarket’s low prices and, eventually, more consumers will shop there for the bargains. Increased consumer volume ends up trumping reduced average spend.

This does beg the question of how supermarkets take the painful initial hit to bottom-line profit of such extreme tactics. Morrisons dutifully re-based its earnings targets and warned over expected lower margins, freeing up billions to fund its price cutting campaign. Tesco has slashed its dividend.

As for Sainsbury’s, there have been persistent rumours of a rights issue, but nothing has happened yet. There is more to come here, and it may not be positive. The situation in the UK grocery sector may well be bearish for a while. Although these shares only sit on a PER of 7.5x, earnings visibility has been markedly reduced by competition and price cuts — and as such, they are for now uninvestable.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Brumby has no position in any shares mentioned. The Motley Fool UK owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Growth Shares

This major UK bank just updated the forecast for the Rolls-Royce share price

Jon Smith talks through an analyst forecast for the Rolls-Royce share price and explains why he thinks further gains could…

Read more »

Middle-aged white male courier delivering boxes to young black lady
Investing Articles

This FTSE 100 share looks like a Black Friday bargain for me!

Our writer explains why he recently took the opportunity to buy this ultra-cheap FTSE 100 share after its 39% year-to-date…

Read more »

Investing Articles

What will happen to the stock market in 2025? Here’s what the experts say

The UK stock market did well at the start of this year but has faltered towards the end. Our writer…

Read more »

Investing Articles

After plunging nearly 40%, I’m considering buying this bargain FTSE 100 stock

Paul Summers has been running the rule over one of the year's biggest FTSE 100 losers. Is a screamingly cheap…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: this month’s lower-risk, higher-yield Share Advisor recommendation [PREMIUM PICKS]

Ice ideas will usually offer a steadier flow of income and is likely to be a slower-moving but more stable…

Read more »

Investing Articles

Should I buy growth or value in my Stocks and Shares ISA?

Here’s why Stephen Wright's looking past the difference between growth stocks and value shares when finding investments for his ISA.

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »