Why J Sainsbury plc’s Investment Drive Should Ignite Earnings Growth

Royston Wild evaluates what J Sainsbury plc’s (LON: SBRY) capex plans should deliver stunning earnings expansion.

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Today I am looking at why I believe J Sainsbury‘s (LSE: SBRY) (NASDAQOTH: JSAIY.US) strategic expenditure drive should facilitate robust growth in coming years.

Convenience and online investment to boost growth

The age of the supermarket megastore ‘space race’ is well and truly dead. Changing consumer habits has seen customers flock from traditional large outlets to convenience stores for smaller, more regular shopping trips, and Sainsbury’s is looking to build on this trend — the supermarket is currently reporting growth of 15% in this sub-segment.

Of the 1 million square feet of new floorspace during 2013 which Sainsbury’s unveiled last year, the firm dedicated the vast majority of this to sainsbury'sbuilding its portfolio of convenience stores — the company opened 91 of its smaller outlets last year versus just 13 new megastores.

The chain is also devoting large sums to store refurbishments and extensions where appropriate to freshen its appeal to traditional customers.

Elsewhere, the firm is also ploughing vast sums into its online operations in a bid to latch onto surging growth rates here. Research house IGD expects internet grocery transactions to more than double, to £206bn, by 2018, and Sainsbury is rolling out a number of initiatives — such as revamping its website to cater for the exploding smartphone and tablet PC market — to underpin strong sales expansion.  

A spectacular value pick

Sainsbury’s has been a dependable deliver of solid earnings growth for many years, and City analysts expect the supermarket to punch a further 4% advance for the year concluding March 2014, results for which are due on Wednesday, 7 May.

The impact of intensifying competition is expected to result in a 2% slide in 2015, however, although a 1% bounceback is anticipated the following year.

Even so, Sainsbury’s could be considered excellent value at current prices — P/E multiples of 10 and 9.9 for 2015 and 2016 respectively camped around the bargain benchmark of 10 times prospective earnings.

Investors should be aware of the massive impact of the fragmentation of the grocery space on Sainsburys’ earnings potential in coming years. And the supermarket itself has warned that “although some economic indicators are showing an improvement in the health of the economy, we expect the outlook for customers to continue to be challenging for the coming year.”

Still, I believe that the supermarket’s increasing investment in the white-hot growth areas of convenience and online — not to mention ongoing drive to improve brand and product quality — should help to mitigate the march of the budget retailers. With consumer spending power also steadily recovering, I believe that Sainsbury’s is a snip at current price levels.

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.

Royston does not own shares in J Sainsbury.

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