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Tempted by the Sainsbury’s share price? Here’s what I think you should know

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Supermarket aisle with empty green trolley
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With a dividend approaching 5% and a low price-to-earnings multiple, the Sainsbury’s (LSE:SBRY) share price looks mighty tempting right now.

The shares have fallen by 15% since January 2019. If you’re bullish for the future, that’s a tidy discount.

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Sainsbury’s appears on the face of it to be a much better buy that its FTSE 100 rivals Tesco and Morrisons that can only offer dividends in the 2.3% range, at twice the price with trailing P/E ratios approaching 20. So what’s the problem?

Asda fail

The unsuccessful £7.3bn takeover of Asda has heaped extra pressure on the Sainsbury’s share price, which perhaps explains why it is trading at just 10 times earnings.

Bosses originally told the market that the mega-merger — which would see the UK’s second and third-largest supermarket chains join forces — would help them to cut costs by £1.6bn and pass £1bn of savings to shoppers.

It would also make Sainsbury’s the largest supermarket by market share, beating long-time rival Tesco.

But the Competition and Markets Authority struck down the deal in April and slapped a 10-year ban on the two giants attempting a merger, warning that the union posed too great a risk for higher prices and less choice for shoppers.

Profit warning

There was more concerning news in a second quarter trading statement for the 12 weeks to 21 September.

CEO Mike Coupe (who, let’s not forget, angered shareholders by taking a 7% pay rise to £3.8m in the wake of the failed merger) announced a five-year £500m cost-cutting exercise and said that underlying half-year profits would take a £50m hit.

Does this turnaround plan make the Sainsbury’s share price a buy? Not for me.

It’s a change which is sorely needed, that’s for sure. While revenues have increased over the last four years, from £23.5bn to £29bn, over the same period both operating profits and pre-tax profits have almost halved, from £707m to £312m, and from £548m to £239m respectively.

Profit warnings should be a red flag to value investors in general, as they rarely happen in isolation. It’s more likely that a second profit warning will follow the first, which leads inevitably to another share price slide. Then that headline P/E ratio starts to look less of a bargain.

Measure for measure

According to the latest trading update, like for like sales were under water to the tune of 0.2%, which sounds like an improvement set against a 1.6% loss for the first quarter of 2019. But compared to upstart rivals like Lidl, which posted sales growth of 9.2% across the same period, it looks less impressive.

Sainsbury’s will close up to 40 stores at part of its reorganisation and its financial services arm Sainsbury’s Bank will follow Tesco out of the market, putting an “immediate stop” to new mortgage lending.

The takeover of Argos in 2016 also looks to be adding more costs to Sainsbury’s bottom line: it said as part of the update that it would close 70 Argos stores and bring 80 more into Sainsbury’s supermarkets.

I just can’t see the upside to the Sainsbury’s share price at the moment, and I’d say there are a whole host of more attractive options available to investors looking for quality shares at a good price.

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We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

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Tom has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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