Shares in Sainsbury’s (LSE: SBRY) have outperformed the FTSE 100 by around 14% in the last year and this trend could continue over the medium term. That’s at least partly because Sainsbury’s is now in pole position to buy Home Retail Group, with it making a £1.4bn bid for the company on Friday. And with rival bidder Steinhoff pulling out of the process, Sainsbury’s looks set to complete the deal.
The purchase of Home Retail will allow Sainsbury’s to deliver significant synergies. Furthermore, it should provide substantial cross-selling opportunities, with Argos concessions likely to be a new feature in Sainsbury’s stores in the coming years. This could help to boost the company’s sales and with the UK economy continuing to perform relatively well, the simplified pricing strategy introduced by Sainsbury’s could become increasingly popular among less price-conscious consumers.
With Sainsbury’s trading on a price-to-earnings (P/E) ratio of 12.7, it seems to offer good value for money. And with its bottom line likely to see a major boost if the Home Retail deal goes through, it has a clear positive catalyst for future share price growth.
Under-pressure valuation
Also beating the FTSE 100 in the last year has been high street baker Greggs (LSE: GRG). Its shares have outperformed the wider index by 17% during the period, even though they’ve fallen by 16% since the turn of the year.
That share price fall appears to be at least partly due to Greggs’ rather generous valuation. For example, it still trades on a P/E ratio of 18.6 despite its recent fall and with its earnings due to decline by 5% this year. It would be of little surprise for its valuation to continue to come under pressure.
Of course, Greggs remains a strong turnaround play. It’s becoming increasingly efficient and adding new products to its menu to offer cross-selling opportunities, while also closing unprofitable stores and opening new ones. This strategy should pay off in the long run, but it may be prudent to await a more appealing share price before piling in.
Unappealing PEG
Meanwhile, ABF (LSE: ABF) continues to be a strong performer, with its shares having beaten the FTSE 100 by 24% in the last year. A key reason for this is the success of its retail operation Primark, which continues to deliver impressive sales growth. In fact, the rising importance of Primark is moving ABF away from being a focused food business and more towards a retail operation, which could be viewed as a good thing since it provides a degree of diversity.
However, with ABF trading on a P/E ratio of 33.9, it’s difficult to see a major upward rerating over the medium-to-long term. And while ABF is forecast to grow its bottom line by 18% next year, combining this figure with its P/E ratio equates to a rather unappealing price-to-earnings growth (PEG) ratio of 1.9. As such, and while it’s a relatively high quality business, there may be better options than ABF available elsewhere.
