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Should I Buy J Sainsbury Plc?

I’m shopping for shares again. Should I fill my basket at Britain’s in-form supermarket J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US)?

Supermarket sweep

Last time I checked out J Sainsbury, in October last year, it was winning the supermarket wars. Its share price had shot up 20% across the year, while rival Tesco (LSE; TSCO) (NASDAQOTH: TSCDY.US) was down 25%. You could almost taste the difference, to coin a phrase. Can Sainsbury’s continue its winning streak?

Fresh produce is seasonal, and so is business success. Sainsbury’s has been grabbing market share since 2004, but that has come to a halt. Its share of the UK grocery trade held steady at 16.5% in the 12 weeks to 17 July, according to retail analyst Kantar Worldpanel, although on closer inspection, things aren’t so bad. Sainsbury’s is the only one of the big four to retain market share over the past 12 months, growing an impressive 3.8% year-on-year. Tesco, Asda and Morrisons lost ground to Waitrose (which grew a stonking 10.9%), Lidl and Aldi, which now account for 11.5% of the grocery market.

Wage slaves

Supermarket shares have struggled generally since the financial crisis. Sainsbury’s is up just 15% over the past three years, against 24% for the FTSE 100 as a whole, although it did better over 12 months, returning 27% against 19% for the index. Tesco is down 8% over three years, although it rebounded 16% over 12 months. Slow wage growth has hit consumer spending power. Grocery inflation was 3.9% over the past 12 months, three times the rate of earnings growth, which was a lowly 1.3% in the 12 months to April. Analysts expect wage woes to last several years.

Sainsbury’s management is downbeat on economic prospects, but sales data has been more upbeat, with 20% growth in its convenience stores, and 16% growth online. Non-food sales have been growing at twice the pace of food sales, particularly in homeware, kitchen electricals and cookware. Unlike market leader Tesco, which almost lost its kingdom for a horse, Sainsbury’s avoided the recent meat scare.

Basket cases

Following recent share price growth, Sainsbury’s now trades at 12.9 times earnings. That makes it marginally cheaper than the FTSE 100 average of 13.25 earnings. It yields a chunky 4.2%, covered 1.8 times, beating the index average of 3.46%. Troubled Tesco is cheaper at 10 times earnings, although still yields 4%.

Sainsbury’s still has the brighter prospects, with steady forecast earnings per share (EPS) growth of 6% to March 2014, and 6% to 2015, against 0% and 4% for Tesco. Broker Morgan Stanley’s shopping basket is currently underweight on Tesco and Morrisons, and overweight on Sainsbury’s. That sounds about right. Sainsbury’s is still the pick of the supermarkets, but future performance may be a little more mixed.

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> Both Harvey and The Motley Fool own shares in Tesco.