Today I am outlining the investment case behind three of the UK’s biggest High Street stalwarts.
J Sainsbury
Embattled mid-tier grocer Sainsbury’s (LSE: SBRY) ongoing struggle to retain its customer base was once again highlighted by Kantar Worldpanel data this week. The release showed till rolls at the London firm dip again during the 12 weeks to March 1, with a 0.5% sales fall driving the supermarket’s market share to 16.8%.
City brokers expect Sainsbury’s to record a 22% earnings decline for the year ending March 2015 in the face of these pressures, and an additional 13% dip is anticipated for fiscal 2016. It could be argued that these figures still create decent value for money, however, with P/E multiples of 11 times and 12.6 times for these years falling within the watermark of 15 times which marks reasonable value for money.
But given the relentless charge of the discounters, and increasing congestion in the growth areas of online and convenience, I believe that these unattractive earnings forecasts could be set for heavy downgrades in the months ahead.
On top of this, I reckon that dividend chasers’ appetite for Sainsbury’s is also likely to come under pressure as top-line travails smash the bottom line — the number crunchers are currently predicting a total payment of 12.7p per share this year, down from 17.3p in fiscal 2014. And a further reduction, to 11p, is forecast for next year.
Home Retail Group
DIY and catalogue colossus Home Retail Group (LSE: HOME) has suffered a miserable time in Thursday business and was recently trading 10% lower on the day. The business announced in today’s latest financial update that group like-for-like sales at both its Homebase and Argos stores collapsed in the eight weeks to February 28, with underlying revenues at the latter sinking 5% during the period.
Still, Home Retail Group affirmed its belief that pre-tax profit for the year concluding February 2015 “will be towards the top end of the current range of market expectations of £120m to £132m,” with much of the recent top-line weakness being prompted by tough comparisons.
And the company reiterated its belief that its two-year restructuring programme — including the closure of underperforming stores and growing emphasis towards e-commerce — should continue to deliver the goods during the next few years.
This view is shared by City analysts, who expect Home Retail Group to follow earnings growth of 13% for fiscal 2015 with expansion of 10% and 11% for 2016 and 2017 correspondingly. Consequently the firm carries P/E multiples of 15.6 times and 14.3 times for this year and next, making it an attractive retail pick for many.
Cineworld Group
Popcorn and pictures play Cineworld (LSE: CINE) cheered the market in Thursday trading following a bubbly trading update, and the stock was recently dealing 5.8% higher on the day.
Despite a marginal slip in cinema admissions, Cineworld still managed to outperform the wider market and saw revenues leap £619.4m last year from £406.1m in 2013 as it hiked ticket prices. This prompted pre-tax profit to more than double during the period, to £67.3m from £30.9m.
The cinema chain noted that it has made a stellar start to the current year, with duct tape flick Fifty Shades of Grey helping it enjoy its best ever weekend. And with blockbusters Star Wars: Episode VII, The Hunger Games: Mockingjay Part 2, and Bond outing Spectre all slated for release this year, the firm should enjoy another resplendent performance in the months ahead.
Following last year’s solid advance, the City expects Cineworld to clock up further earnings growth to the tune of 6% in 2015 and 11% in 2016, figures which leave the business changing hands on decent P/E multiples of 17.7 times and 16.1 times. And with the firm expanding in the UK as well as across its Cinema City European and Israeli subsidiary, I believe investors can look forward to further solid earnings expansion in the years ahead.
