Why J Sainsbury plc Could Outperform Tesco PLC This Year

J Sainsbury plc (LON: SBRY) could be a better bet than Tesco PLC (LON: TSCO) in 2016.

| 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.

Shares in the UK’s largest retailer, Tesco (LSE: TSCO) have been on a roll this year as confidence grows that the company’s turnaround plan is finally starting to yield results.

Indeed, year-to-date Tesco’s shares are up by 28%, outperforming the wider FTSE 100 by a staggering 29% excluding dividends.

However, Tesco’s impressive performance this year hasn’t filtered through to the company’s peers. For example, shares in Sainsbury (LSE: SBRY) have only gained 12% year-to-date, but now that the company has finalised its bid for Home Retail, this performance could be about to change.

Bigger and better

Sainsbury’s initial bid for Home Retail surprised the market, and a number of the company’s shareholders instantly announced their lack of support for the deal.

But by merging with Home Retail, Sainsbury’s will become a £6bn general merchandise business – larger than that of Marks & Spencer or John Lewis. The deal will also help Sainsbury’s fill under-used space within its stores by bringing more Argos outlets into its supermarkets, reducing costs and improving earnings per square foot. Management is targeting £160m of cost savings and wants to bring 55% of Argos outlets into a Sainsbury’s.

And Sainsbury’s plan to integrate with Home Retail may help the company achieve something Tesco has been struggling to do for a long time, drive footfall into vast superstores by bringing in other businesses. Tesco has acquired businesses such as restaurant chain Giraffe and coffee chain Harris & Hoole, but both are still heavily lossmaking for the company.

There are some concerns that Sainsbury’s will have the same issues with Home Retail. Argos sales are coming under pressure from online consumer internet plays like Amazon, and it’s hardly the destination of choice for kids to spend their pocket money anymore.

Still, the existing Argos-Sainsbury’s network has already seen some success, and it appears that management is betting on the continued success of this network. Moreover, Sainsbury’s Bank acquired the Argos consumer loan book as part of the buyout, a raft of new customers to sell products to, as well as picking up the interest on the existing loans.

Valuation is key

If Sainsbury’s can successfully integrate Home Retail, the company’s earnings will almost certainly benefit. However, it seems as if the market doesn’t have any confidence in the company’s ability to complete the merger successfully. Sainsbury’s currently trades at a forward P/E of 12.5 and yields 3.9%. In comparison, shares in Tesco trade at a forward P/E of 40.2 and yield only 0.2%.

Overall then, Tesco may have outperformed over the past three months but after recent gains, the company’s shares are trading at a premium to peers. Meanwhile, Sainsbury’s shares are trading at an attractive valuation, and if the company successfully integrates Home Retail, earnings should grind steadily higher, which will drive a rerating of the shares. 

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Down 37%, here’s one of my favourite FTSE 100 bargain shares to consider

This FTSE 100 retailer's shares have collapsed in 2024. Despite tough trading conditions, is now the time to consider buying…

Read more »

Investing Articles

Which do I like best today, Nvidia or Tesla stock?

EV maker Tesla stock is on the up, while Nvidia growth is softening a bit. But they're both in the…

Read more »

Investing Articles

After jumping 15%, my favourite FTSE 250 stock looks set for the premier league

Games Workshop stock recently reached an all-time high, placing it within touching distance of promotion from the FTSE 250.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

1 top growth stock on my Christmas buy list!

Ben McPoland reveals one top-notch growth stock down 29% that he plans to stuff into his portfolio in time for…

Read more »

Growth Shares

This FTSE 250 stock soared 9% yesterday! Is the party just beginning?

Jon Smith points out a FTSE 250 stock that leapt based on some speculation yesterday, but questions whether to get…

Read more »

Investing Articles

£10k in savings? These 2 gems could make £832 in passive income

Jon Smith outlines a couple of dividend shares with an average yield above 8% that could enhance a passive income…

Read more »

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 »