Is J Sainsbury now a screaming buy or a basket case?

Last week’s news that the Competition and Markets Authority (CMA) has blocked the proposed merger between J Sainsbury (LSE: SBRY) and Walmart’s Asda sent Sainsbury’s share price plunging. So is the stock now a bargain that I should snap up?

The CMA thinks consumers would have been worse off because of rising prices if it had allowed the deal. But Sainsbury’s chief executive, Mike Coupe, is on record as saying that “the specific reason for wanting to merge was to lower prices for customers.” He went on to explain that he thinks the CMA’s decision ignores the “dynamic and highly competitive nature” of the grocery market in the UK. Nevertheless, the two firms have no intention of appealing the decision. It’s over. The idea didn’t work.

A difficult business

I think Coupe made a good point though. High-volume supermarket grocery is a terrible business to get into, characterised by wafer-thin margins and intense competition. If I wanted to start a business from scratch, I’d avoid the sector like the plague and look for something with better economics.

And Sainsbury has been suffering. Over the past year, the firm’s share of the UK grocery market has slipped down from 15.8% to 15.3%, according to research and analyst firm Kantar Group. But Asda’s share has shrunk from 15.6% to 15.3% too, which is a trend that is affecting all the ‘big four’ UK supermarket chains. They’re all losing ground to German discounters Aldi and Lidl, which together now have 13.6% of the market in the UK.

When the idea for the deal was first announced about a year ago I said: “I’m not so sure that going ‘large’ is such a good way to compete in the longer term.” I argued that the onslaught from big-discounting competition in the sector would probably be best met by bending, “so managed contraction looks like an attractive option to me, not rapid expansion.” Indeed, the move towards a deal looked to me like Walmart’s way of getting shot of Asda and out of the UK market, which had been one of the firm’s worst-performing geographies.

Lacklustre financial record

I’d be wanting to get rid of my shares in Sainsbury’s if I had any. The sector is unattractive to me, and the firm’s financial performance has been lacklustre as you can see from this table:

Normalised earnings have declined over the past six years and operating cash flow has returned to near where it started over the period. But I think the real story of the company’s decline shows up in the dividend record. I’m avoiding the shares.