Here’s Why J Sainsbury plc Could Be Worth 382p!

J Sainsbury plc (LON:SBRY) is under the spotlight.

| 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.

Sainsbury'sSainsbury’s (LSE: SBRY) is in trouble: like-for-like sales, excluding VAT and fuel, declined by 2.8% in the three months to 27 September. Its stock is down more than 30% in 2014, and also dipped by more than 3% in early trade on Wednesday — but should you bet on it right now?

There are several reasons why the food retailer’s shares are attractive in the 240p-300p range.

It’s Bad Out There

Sainsbury’s stock reached a one-year high of about 414p in mid-November 2013, but a new 52-week low was registered on Wednesday as the shares hit 240p following a downbeat Q2 trading update.

Inevitably, the shares of Morrisons and Tesco have been hammered as well, and are down 5% and 3%, respectively.

A bearish view on the sector is justified, and the shares of three of the major food retailers in the UK may well end up trading at much lower multiples than 5/7x adjusted operating cash flow. The downside could be 40% or so.

Negative sentiment towards the sector has led many pundits to prepare for a worst-case scenario, which is scary indeed. Still, I don’t think that Sainsbury’s stock, at this price, would be such a bad bet if the shares were included in a diversified portfolio.

Current/Non-Current Assets

The food retailer has total assets of £16bn, some 60% of which are represented by property, plant and equipment, while long-term notes and other investments are worth £2bn. The amount of goodwill and intangibles on the balance sheet is negligible, which is a good thing.

As at 15 March 2014, Sainsbury’s estimated market value of properties, including our 50% share of properties held within property JVs, was £12bn“, the food retailer stated when it reported 2014 results.

Now, assuming property, plant and equipment, as well other non-current assets, are worth zero (yes, nothing!), Sainsbury’s would still be worth £4.3bn — the value of its current assets. That’s about 10% less than its current market value.

It’s complete nonsense, however, to suggest that its long-term assets should be valued at liquidation value according to a worst-case scenario. And even if we assume a massive 70% discount to the book value of those assets, Sainsbury’s could be worth £7.3bn, which is more than the value of its equity plus its net debt.

In this scenario, Sainsbury’s stock would be worth 382p, for an implied 50% upside.

What Should You Do?

Clearly, it’s not an easy call.

So much uncertainty surrounds the largest food retailers in the UK that this may be time to invest in them, the bulls argue. They may well be right. Investors, however, should bear in mind that if a worst-case scenario plays out, Sainsbury’s, Morrisons and Tesco will continue to lose market share at a fast pace as it has occurred in recent weeks.

Then, the losses will be painful…

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.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »