2015 is set to be an important year for Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US). That’s because the UK economy is rapidly improving and, with disposable incomes being on the rise in real terms (i.e. after the effects of inflation) for the first time since the start of the credit crunch, pressure on household budgets should alleviate and improve sales for the retail sector.
Investor Sentiment
Of course, the market is not particularly enthused about Sainsbury’s short term prospects. For example, the company’s share price has risen by just 0.5% since the turn of the year, which is behind the FTSE 100’s gain of 3% in the same time period.
However, this could be about to change, since Sainsbury’s is set to post improving financial figures over the next couple of years that could stabilise investor sentiment in the company. In fact, Sainsbury’s is forecast to see its bottom line fall by just 2% next year which, although still disappointing, shows that the 20% fall of last year may not prove to be ‘the norm’ over the medium term.
And, with shares in Sainsbury’s trading on a price to earnings (P/E) ratio of just 11.7 (versus around 15.5 for the wider index), there is scope for an upward rerating if the supermarket can meet its expectations and start to turn its fortunes around.
Growth Potential
Clearly, Sainsbury’s has lower growth prospects than the FTSE 100, which has annualised mid to high single digit growth forecast over the medium term. However, it is not the only company set to disappoint on the earnings growth front, with global consumer goods company, Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US), due to see its net profit rise by just 3% this year, followed by growth of 8% next year.
Despite such a disappointing growth rate, Reckitt Benckiser trades at a significant premium to the FTSE 100, with it having a P/E ratio of 23.6. As such, its share price could come under pressure since, although it is a relatively defensive play with an excellent stable of brands, its lack of above average growth could cause investor sentiment to wane moving forward.
Similarly, the rating on cash and carry specialist, Booker (LSE: BOK), seems to be too high. Certainly, it is expected to post better growth numbers than Sainsbury’s or Reckitt Benckiser, with double-digit growth expected in each of the next two years, but its P/E ratio of 23.9 seems to be rather excessive. Of course, like Sainsbury’s it should also benefit from an upturn in the UK economy, but there seems to be little prospect of a real catalyst to push its share price considerably higher.
Looking Ahead
So, while in the short run things could get worse before they get better for Sainsbury’s, its longer term prospects appear to be sound. Its low valuation highlights its rerating potential, with a stable earnings outlook and transition towards a positive growth profile post 2017 having the potential to improve investor sentiment and act as a catalyst on the company’s share price.
