Why the Sainsbury’s share price rose 11.7% in September

Roland Head gives his verdict on the J Sainsbury (SBRY) share price after recent gains.

| 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.

Has the J Sainsbury (LSE: SBRY) price finally bottomed out and returned to growth? There are some signs of hope.

After hitting an all-time low of 177p on 15 August, SBRY stock had already risen 10% to 196p by the end of August. The shares continued to rise in September, logging an 11.7% gain over the course of the month. As I write, the shares are changing hands for 205p.

In this article I’ll explain why investors are looking at this stock with fresh hope — and why I still have some concerns about the outlook for shareholders in this 150-year-old business.

What’s changed?

The supermarket chain’s shares have fallen by more than 30% over the last year as it’s reported falling profits and lower margins.

Since the group’s planned merger with Asda was blocked by the regulator in April, investors have been waiting to see what chief executive Mike Coupe will do next. In September we found out. Mr Coupe plans to stay focused on the core grocery business and cut costs across the group by £500m over the next five years.

Sainsbury’s store estate will also get a revamp. Around 10 new supermarkets are planned, offset by 10-15 closures. A similar mix of openings and closures will be made to in-store Argos concessions and to the convenience store estate.

Finally, Sainsbury’s Bank will stop offering mortgages and will be managed to improve profitability. The bank’s new boss, Jim Brown, has been told to double its underlying pre-tax profit and lift returns on capital to more than 10%.

The bank is not expected to receive any further cash injections from the group after this year. Indeed, it’s expected to start returning cash to the group.

My view

These planned changes all sound sensible to me. Funding this programme will be made easier by a £50m reduction in annual pension contributions. The company also hopes to raise between £270m and £350m from property development projects on surplus land.

My guess is that the group’s financial services division, which includes the bank, will aim to boost its profit margins by focusing on more profitable consumer lending, including customer credit for Argos shoppers.

However, despite all of this promise, it’s worth remembering that Sainsbury’s continues to face pressure to price-match discounters Aldi and Lidl while maintaining a more upmarket feel. It’s not an easy balance to achieve.

Should you buy or sell Sainsbury’s?

Sainsbury’s is currently the least profitable of the big supermarkets. It lacks the wholesale food operations that have helped Tesco and Morrisons return to growth. And it doesn’t have the buying power of Tesco or the high level of freehold property ownership enjoyed by Morrisons.

In my view, the shares are priced about right at current levels. Trading on 10.5 times forecast earnings with a 5% dividend yield, I’d rate the shares as a hold, at best. I think there’s still a significant risk of further disappointment, so I would prefer to wait for signs of progress before considering a buy.

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.

Roland Head owns shares of Tesco. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »