I think the shares of Sainsbury’s (LSE: SBRY) offer a rather attractive entry point right now. But will they rise to 350p by the end of the summer, or will they plunge to 200p as pressure on food retailers’ operating profits continues to build up in the UK?
Here are a few things you should know before assessing the possible value of the investment.
On Its Way Up?
Back in May 2014 I argued that Sainsbury’s, the third-largest food retailer in the UK, was not the most obvious restructuring play in the industry. At that time the stock traded at 339p and I predicted a 20% downside for investors, for an implied price target of 270p.
The shares plunged to a multi-year low of about 224p in early October, and now trade at 260p.
Time and again, I have said trading multiples mean very little when it comes to assessing the equity value of food retailers, one of the reasons being that nobody really knows whether the biggest players in the industry have hit rock bottom, or more pain lies ahead in terms of assets write-downs and shrinking profitability.
So, where does value reside in Sainsbury’s?
I still believe other shares in the sector, as well as other sectors, offer more upside than Sainsbury’s in the next 12 to 24 months, but Sainsbury’s could benefit from corporate action and restructuring plans at its rivals. Recent trends have shown that.
Read-Across
As I pointed out in my coverage of Tesco (LSE: TSCO) back in December, Tesco’s latest profit warning accelerates the process according to which the largest supermarket chains in the UK must take bold action, which is fantastic news for ailing food retailers and their shareholders, in particular.
While I prefer Tesco, whose shares have risen more than 30% since mid-December, the shares of Sainsbury’s have surged only 14% in about a month. Could they deliver a 40% pre-tax return to shareholders?
Well, if it’s a bounce from the lows, surely plenty of value could be up for grabs in months ahead. Brokers disagree, and they have pencilled in an average price target of about 240p a share. The possible rise in the shares does not depend on Sainsbury’s own strategy and fundamentals, however.
The latest few weeks of trading suggest that Sainsbury’s will continue to deliver value to its shareholders if its chief rivals, Tesco and Morrisons, continue to implement radical changes. In this context, Sainsbury’s is cutting costs to preserve profitability, which should help its financials. And even assuming a massive discount to the book value of its assets, Sainsbury’s could be worth more than £7bn, which is a 40% premium to its current equity value.
