The banking and supermarket sectors have been two of the worst performers for nearly a decade, hitting a swathe of household names, including the following two companies. Can they buck their sectoral trends?
Big bad banks
Years after the financial crisis, banks remain a miserable place to put your money. In fact, the sector seems to go from bad to worse, as US supervisors launch one European “bank job” after another, in what looks more like an aggressive tax grab than an attempt at sensible regulation. However, this isn’t the only reason that the share price at Barclays (LSE: BARC) is down another 30% over the past 12 months.
Barclays is increasingly looking like two separate businesses, and the good news is that management is looking to focus on the winning half, while dumping the loser. Its core business posted first-half profits before tax of £3.9bn, a rise of 9%, which makes it a keeper. By contrast, its non-core business made losses of £1.9bn, justifying management’s decision to kick it into touch. The business is shrinking, with assets down another £8bn to £46.7bn, helped by the sale of Barclays Africa, but there is still some way to go.
Two-way split
Bank balance sheets became so complex before the financial crisis that it was impossible for investors to see where the value really lay. Barclays’ earnings and dividends will continue to disappoint until the remaining non-core assets are finally off the books. Management can then focus on squeezing all possible value out of Barclays UK’s retail and small business banking operations, and Barclays Corporate & International’s business and investment banking, and international cards operations.
Chief executive James Staley will deserves the gratitude of investors if he makes a success of simplification. There are plenty of potential pitfalls. For example, we don’t know the impact of Brexit yet, but EU passporting rights look increasingly vulnerable. Barclays looks tempting at 10.11 times earnings and yielding 3.90%, just beware nasty surprises.
Life tastes worse
The grocery sector has been a tough place to be for years, as long-term investors in Sainsbury’s (LSE: SBRY) know all too well. German discounters Aldi and Lidl have ramped up competition to unforeseen levels, while incomes stagnate. The stock’s performance has left a bitter aftertaste, down 37% in the last three years. There is little sign of any respite as the supermarket price war intensifies, and with Sainsbury’s posting a 1.1% decline in like-for-like sales, reversing the recent positive trend. Its market share has dipped below 16%, according to latest data from Kantar WorldPanel.
Thin gruel
Food deflation is hurting margins, with a basket of goods 1.3% cheaper than it was last year. That works in favour of Lidl, the fastest growing supermarket with sales up 12.2%. Its upmarket push is targeting Waitrose but Sainsbury’s could also fall victim.
Sainsbury’s is more than just a grocer — it could be considered a general merchandise retailer. Around 15 Argos Digital outlets have already been opened in Sainsbury’s stores and a further 200 new digital collection points will follow by the end of the year, which could boost footfall. Yielding 4.93% and trading at 10.16 times earnings, the stock looks priced to go. Sainsbury’s will survive, but whether it thrives is a different matter.
