How low can the Sainsbury share price go?

Struggling supermarket J Sainsbury plc (LON: SBRY) has been a big faller. Is it time to start buying?

| 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.

The J Sainsbury (LSE: SBRY) share price has lagged the FTSE 100 during the recent sell-off and has fallen by nearly 50% over the last year.

Good news has been in short supply. In March, the company’s ambitious plan to merge with Asda was blocked by the industry regulator. In May, annual results showed pre-tax profit down by 29% to £219m. If that wasn’t enough, Sainsbury’s most recent trading update showed like-for-like sales falling across the business.

What next?

Chief executive Mike Coupe has cut prices on more than 1,000 products to try and boost sales. But this won’t help the firm’s profit margins, which are already lower than those of its two main listed rivals.

Will Sainsbury’s end up going bust? My colleague Karl Loomes thinks this is unlikely, and I agree. But that doesn’t necessarily mean the shares don’t have further to fall. I’ve been taking a fresh look at this troubled supermarket’s accounts. Here, I’ll explain what I think is likely to happen next.

Hidden value?

Is there hidden value in Sainsbury’s large store estate? At the time of writing, the group’s market-cap was £3.9bn and its share price 181p. By contrast, the supermarket’s latest accounts value its property portfolio at £10.4bn and indicate a tangible book value of 335p per share.

I like asset-backed investments. But experience has taught me in situations like this, a company’s price/book ratio is often dictated by the earning power of its assets, not their value.

Sainsbury’s weak profit margins and low growth suggest to me a cautious valuation is appropriate. The group’s huge store estate may be a valuable asset on paper, but these big supermarkets aren’t very profitable at the moment. They could also be hard to sell.

Debt worries?

Sainsbury’s net debt was £1,636m at the start of March. Coupe has committed to reduce this figure by £600m over the next three years. Net debt fell by £222m last year, so this plan looks realistic enough. But it also suggests the CEO feels the group’s current borrowing levels are uncomfortably high.

I don’t see any immediate risks here, but I would say that Sainsbury’s gearing is currently higher than Tesco’s, even though Tesco is more profitable. I don’t think that’s ideal.

Will the SBRY share price keep falling?

Sainsbury’s stock currently trades on a forecast price/earnings ratio of 8.8, with a 6.1% dividend yield. That sounds cheap. But it’s worth remembering the firm’s underlying earnings per share have fallen by 32% since 2013/14. The dividend has been cut by 36% over the same period. I think the current share price is a fair reflection of the group’s declining profits.

Although shareholders were rewarded with a 7% dividend hike last year, I’m not convinced this rate of growth is sustainable. Nor are City analysts. They’re forecasting a flat payout for this year and expect earnings per share to fall by 8%.

In my opinion, Sainsbury’s has a tough few years ahead. Although the shares could offer value at this level, any fresh disappointments could see the stock hit fresh lows. I plan to stay on the sidelines, for now.

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

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »