Some FTSE 100 stocks seem to be a little low on investor love. I can’t help thinking Sainsbury’s (LSE: SBRY) is one of them.
As the UK’s second biggest grocery chain, it lives in the shadow of sector leader Tesco. It’s increased market share faster than any rival over the last year but today’s 15.9% remains well short of Tesco’s 28.1%.
Sainsbury’s has Asda, Aldi and Lidl breathing down its neck, with respective shares of 12.3%, 10.3% and 7.4% respectively. It’s not an easy place to be.
The share price is suddenly on the up
Also, there’s a wider feeling that the UK grocery sector’s so competitive, investors can struggle to find value here. Sainsbury’s shares will have their good times and bad times, but will they ever smash it?
Yet suddenly they’ve jumped 15.83% in the last month. They’re still down 5.72% over one year, but even so. What’s happening?
On 7 November, the board reiterated guidance for strong underlying full-year profit growth, helped by improving grocery volumes and a stronger second-half performance from Argos. Full-year free cash flow generation should be strong too, which bodes well for dividend growth. Today’s trailing yield of 4.74% is forecast to hit 4.82% next year and 5.14% in 2026.
That easily beats the Tesco traiing yield of 3.23%, although there’s a reason why that’s relatively low. The Tesco share price has smashed it over the last year, climbing 28.72%. It’s up a blockbuster 64.24% over two (Sainsbury’s rose 26.04% over the latter timescale).
Sainsbury’s is cheaper though, trading at a price-to-earnings ratio of 12.67 times earnings. Tesco’s P/E has climbed to 15.72%. Given Tesco’s stellar run, now may be the time to invest in Sainsbury’s instead.
I think Tesco shares have run their course for now
Last month, RBC Capital Markets took that exact view. It labelled Sainsbury’s Outperform with a 300p price target. If correct, that’s up 8.45% from today’s 276.6p
RBC praised Sainsbury’s for resetting its price/value proposition, and generating more than £1bn of cost savings in just three years. It expects more of the same over the next three years. Like me, it thinks the Sainsbury’s valuation looks “undemanding”.
RBC slapped a Sector Perform rating on Tesco with a 375p price target, broadly in line with today’s 374.4p. It said Tesco may also struggle to boost its market share from here. It’s not easy being top dog.
Personally, I’d expect the big grocery chains to have a tough year, as recession fears return. Labour’s Budget National Insurance hikes will hit the sector hard. Tesco employs more than 300,000 and Sainsbury’s more than 150,000. The 6.7% hike to the minimum wage won’t help. Nor will sticky inflation, now forecast to hit 3% next year.
So I was curious to see that Kantar reckons UK supermarket sales are set to surpass £13bn in December for the first time. I’ve underrated Sainsbury’s. Now I’ll now consider showing it some love and adding the shares to my portfolio in January.
