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Are Sainsbury shares now a screaming buy?

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father playing with his daughter pushing the shopping cart
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This morning, FTSE 100 supermarket giant Sainsbury (LSE: SBRY) said sales in Q1 had been “ahead of expectations“. Does this news, combined with a reasonable valuation and the proposed takeover by private equity of rival Morrisons, now make the shares a screaming buy for me? Let’s look at those all-important numbers first.

Better than expected trading

Excluding fuel, total retail sales at the FTSE 100 member rose 1.6% in the 16 weeks to 26 June. 

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Broken down, sales of grocery and clothing were both better than predicted, rising 0.8% and a massive 57.6% respectively. The former might not seem all that impressive but we need to remember that the company was up against “exceptionally tough comparatives” due to everyone shopping like crazy over the same period in 2020.

General merchandise sales also surpassed expectations, even though these came in 1.4% lower. Sales at Argos fell year-on-year, although one can argue that the rush for laptops, TVs and toys during the spring 2020 lockdown was a one-off. Sainsbury continues to push the Argos brand into its supermarkets, opening 20 Argos spaces during the quarter. 

Overall, these numbers look good to me. News that the company was outperforming the grocery market and all its superstore competitors “on a value and volume growth basis over one and two years” is also encouraging.

But what about the all-important outlook?

Returning to normal

Sainsbury now expects pre-tax profit ofat least £660mfor the current financial year. This is a fine improvement on the consensus forecast of £620m back in April. It’s also impressive considering that shoppers’ behaviour is likely to return to normal as Boris Johnson lifts most coronavirus-related restrictions in England on July 19

Indeed, despite online grocery sales rising 29% in Q1, Sainsbury expects demand to gradually reduce as more people return to its stores. Even so, it’s clear that the company’s online offering continues to be popular. It accounted for almost a fifth of its grocery sales over the last three months, compared to just 8% in 2019/20. 

So why aren’t the shares flying?

Despite these numbers, Sainsbury shares were trading fairly flat this morning. What gives?

I suspect it’s simply down to a lot of the above already being priced in. After all, the shares are up 17% since the start of May, supported by news around the takeover of Morrisons and suggestions that private equity groups may turn their attention to other players in the space. News that existing issues in supply chains will “continue for the remainder of the year” may also be weighing on prospective investors’ minds.

Let’s also get some perspective on Sainsbury’s market share. The £6bn cap does occupy the silver medal spot in the UK supermarket space. However, it’s still far behind top dog Tesco. For me, the latter continues to offer a more enticing combination of market clout, defensiveness, and dividends. It trades on a slightly lower valuation too. There are also other options if I were solely looking for an income stream. I could, for example, take a stake in the Supermarket Income REIT

Looking elsewhere

As a Foolish investor, I must be happy with the prospect of holding a company’s stock for years. With so many great growth opportunities elsewhere, Sainsbury shares don’t make the cut. Taking into account the return to normality, I wonder if the share price may have peaked. A screaming buy? Probably not.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and Tesco. 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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