At What Price Would J Sainsbury plc Be A Bargain Buy?

G A Chester explains his bargain-buy price for 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.

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.

Should you invest £1,000 in Safestyle Uk Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Safestyle Uk Plc made the list?

See the 6 stocks

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. 

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

G A Chester 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

Investing Articles

How Warren Buffett stays ahead of the stock market

When share prices fall, everyone suddenly wants to be like Warren Buffett. But what’s the secret to the Berkshire Hathaway…

Read more »

Investing Articles

Cheap UK dividend shares to consider buying right now

We're only just past the first quarter of 2025, but it already looks like the year could be another good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

What the heck is going on with the Barclays share price now?

The Barclays share price surged 25% as the market open on 10 April. Once again, the volatility’s been driven by…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

What the devil’s going on with the HSBC share price?

The HSBC share price has actually been less volatile than some of its peers, despite its Chinese operations suggesting it’s…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Are Tesco shares a screaming buy after sinking to 9-month lows?

Tesco shares continue to experience price weakness as signs of mounting competition grow. But is it now too cheap to…

Read more »

Investing Articles

Down 31%! 1 top growth stock to consider at $10 for a Stocks and Shares ISA

This high-quality stock has pulled back sharply since November, making it a possible candidate for a growth-oriented Stocks and Shares…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

Down 28% in 8 months, is AstraZeneca’s share price too cheap for me to pass up right now?

AstraZeneca’s share price has fallen a long way from its September high, but this may mean an opportunity for me…

Read more »

Investing Articles

Is April a great time to start investing?

Our writer spotlights a top-tier tech stock that has sold off recently, making it worthy of consideration for someone ready…

Read more »