Playing with the financials of Sainsbury’s (LSE: SBRY), the more I look at projections, the more I struggle to find a way to value the shares of the UK’s second-largest food retailer. And, equally important, I find no answers with regard to where the stock may be headed. Is that right?
Forecasts and discounted cash flow models are not reliable here, in my view. Of course, today’s announcements and interim results haven’t drawn my attention, either. The stock is down 5% today — so what?
So, I looked at the performance of Sainsbury’s in the 90s, when for the first time the stock started to trade above 300p.
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Sainsbury’s in 1990 vs Sainsbury’s in 2014
The shares of Sainsbury’s traded around their current level of 250p in the late 80s and in the early 90s, when they started to rise above 300p. Between 1981 and 1990, financial reports show that Sainsbury’s grew revenue and earnings per share at an average annual rate of 20% and 25%, respectively.
In 1990, when the stock traded in the 250p/300p range, Sainsbury’s reported £7bn of revenue, £470m of operating profit, £451m of pre-tax profit, earnings per share at 19.6p and dividend per share at 6.10p. In those years, its assets base was very different from today, of course. Its shares traded on a price to earnings multiple ranging between 12.7x and 15.3x, a P/E range that tends to signal expansion for retailers. The shares seemed properly priced back then.
Sainsbury’s stock now trades at a discount of up to about 35% to “1990 Sainsbury’s”, based on trading multiples. Yes, growth is a massive problem. And you also must have noticed, if you are familiar with the financials of Sainsbury’s, that Sainsbury’s now needs more than £20bn of revenue to generate between £700m and £800m of operating profit and roughly half a billion pounds of net profit. Earnings per share and the dividend yield are higher, though. You’d buy 1990 Sainsbury’s , but you’d never buy 2014 Sainsbury’s, would you?
Worth Your Money?
Since 1 October, when I said the food retailer’s shares were attractive in the 240p-300p range, its equity valuation has risen by more than 10%, although it has pulled back a bit in the last few days.
Sainsbury’s may be worth your money because value is hidden in its stock at 255p, where it currently trades. By the very nature of the food retail sector, and taking into account the typical cash conversion cycle of food retailers, liabilities are less important when it comes to valuing a company such as Sainsbury’s. In fact, its shares could well be worth between 300p and 400p based on the value of its assets. I hear you: Sainsbury’s is shrinking and its profits are plunging!
Weakness in profit will persist for a few quarters, but I think that no-thrills supermarkets should be very careful with their expansion plans. Some of the big guys out there may decide to shrink quickly and join forces to fend off the threat. And Sainsbury’s is best positioned to fight back.
