Morrisons share price surge: should I buy Sainsburys now?

The Morrisons share price has rocketed higher after two takeover bids. Roland Head explains why he’s looking at buying Sainsburys shares instead.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The Wm Morrison Supermarkets (LSE: MRW) share price has risen by 52% over the last month, thanks to a bidding war between deep-pocketed buyers. I’ve rated Morrisons highly for a long time and reckon the company deserved more attention from UK investors.

However, buying into a bidding war can be risky. Further gains aren’t certain. That’s why I’ve started to look at rival supermarket J Sainsbury (LSE: SBRY). The orange-topped supermarket looks affordable to me and offers an attractive 4% dividend yield. Should I add this stock to my share portfolio?

Morrisons: too late for me

At the time of writing Morrisons share price has risen to 266p. That’s 12p above the latest 254p offer led by private equity outfit Fortress. When shares trade above a takeover offer price, it usually means that the market is expecting a higher bid.

I agree with the market view on this. Morrisons owns the freehold to most of its stores. It also has a large food production business and a growing wholesale operation — including a deal to supply Amazon. My analysis suggests that a fair bid for Morrisons would be 260p–270p per share.

I’m confident that private buyers should be able to make money buying at this level. But I think any further gains for shareholders will be minimal. There’s also the risk that the takeover will fail, which could cause Morrison’s share price to fall sharply.

Sainsburys shares: a buying opportunity?

Although it’s the UK’s second-largest supermarket, Sainsburys has been through a difficult patch in recent years. Growth has been slow, and profit margins have been lower than at Tesco or Morrisons.

I’ve avoided the stock for much of this time, but Sainsbury’s performance over the last year has won me over. Chief executive Simon Roberts has fine-tuned the business and Sainsbury’s recently increased its profit guidance for this year.

Earnings ‘upgrades’ are often a sign that future gains are likely, in my experience. Although Sainsbury’s share price has risen by 50% over the last year, the stock still looks decent value to me.

Why I’d buy Sainsbury

As I write, Sainsbury’s share price is sitting at 283p. This prices the shares at 13 times forecast earnings, with a dividend yield of almost 4%. I reckon the supermarket’s stock looks decent value at this level.

However, although I have a positive view of Sainsbury’s, I can still see a few risks. One concern is that the UK’s supermarket sector is incredibly competitive. Despite its size, Sainsbury’s still feels that it needs to cut prices to compete. The group recently announced £50m of “targeted price reductions”. These measures should be popular with shoppers, but they could slow the group’s profit growth.

I don’t expect Sainsburys shares to rocket higher. But I think that this business should continue to make steady progress while paying shareholders an attractive cash yield. I’d be happy to buy SBRY stock for my portfolio today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Morrisons and Tesco and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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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