Buying stocks at a fair price tends to pay off over the long term, but we all love to bag a real bargain. Bagging a bargain often requires patience.
Today, I’m going to tell you the price I believe would put J Sainsbury (LSE: SBRY) in the bargain basement.
An ill wind
It has become clear over the last few years that an ill wind is buffeting the Footsie’s big supermarkets. Tesco, Sainsbury’s and Morrisons have all come to recognise that the grocery sector is undergoing structural change.
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The big, out-of-town, one-stop weekly shop is in decline. Customers are shopping more frequently. Online, convenience outlets, discounters Aldi and Lidl, and high-end grocers Waitrose and Marks & Spencer are seeing strong growth at the expense of the big supermarkets’ traditional proposition.
As the data in the table below suggests, it looked for a long time as if Sainsbury’s might avoid the worst of the ill wind. But over the last year the company has joined Tesco and Morrisons in the teeth of the gale.
| Post-bear market share price peak (p) | Date of share price peak | Recent share price low (p) | Peak to low fall | |
| Tesco | 454 | Apr. 2010 | 169 | -63% |
| Morrisons | 326 | Dec. 2011 | 152 | -53% |
| Sainsbury’s | 412 | Nov. 2013 | 225 | -45% |
Valuing the supermarkets
In a previous article, I had Morrisons in the bargain basement at about the 150p level its shares were then trading at. This was on the basis of a 9% dividend yield, and what I saw as management’s credible strategy for delivering free cash flow to support the dividend for at least three years.
In another article, I suggested a bargain-basement price for Tesco of below 160p. In the recent absence of company guidance on earnings and clarity on the dividend, 160p was based on tangible net asset value (TNAV) at par.
Sainsbury’s intimated lower earnings and a dividend cut for the full year within its recent half-time results, but the company has not yet updated analyst consensus forecasts on its corporate website. I’m going to value Sainsbury’s on the same TNAV basis as I did Tesco.
Sainsbury’s asset valuation
Sainsbury’s TNAV at the last balance sheet date was £5.2bn. On the face of it, with the shares currently at 260p and the company’s market capitalisation at £5.0bn (and, thus, below TNAV), Sainsbury’s is in the bargain basement.
However, there are two big “off-balance-sheet” numbers that need to be factored in, as I did for Tesco. One is positive (£4.2bn), being the difference between the market value of the company’s property and the (lower) value recorded on the balance sheet. The other is negative (£5.1bn), being the value Sainsbury’s records for non-cancellable operating lease liabilities that don’t appear on the balance sheet at all.
Adjusting the book TNAV for these two big off-balance-sheet numbers gives me a more accurate TNAV of £4.3bn — which equates to a share price of 225p. Therefore, I reckon Sainsbury’s would be in the bargain basement at a price of below 225p.
