These FTSE 100 shares offer brilliant value on paper. Are they great buys, or are they classic investor traps?
Big all-round value
On paper, J Sainsbury (LSE: SBRY) seems to offer top value. City analysts think annual earnings will near-enough double in this fiscal period (to March 2022). This leaves the supermarket trading on a forward price-to-earnings (PEG) ratio of 0.1. A reading below 1 suggests a share is undervalued. Sainsbury’s also boasts a chubby 4.2% dividend yield at current prices.
Fierce competition has been a huge problem for Sainsbury’s over the past half a decade or so. And it remains a huge danger as its competitors rapidly expand. Just this week, discount chain Aldi opened its first checkout-free site in London, a store designed to remove the problem of queues.
The increased popularity of low-cost chains is a growing problem for middle-of-the-road operators like Sainsbury’s. And especially right now as soaring inflation puts household budgets under the cosh.
City analysts think Sainsbury’s will enjoy profit increases over the next three years. No doubt the grocer’s massive investment in online shopping has helped these projections and boosted its growth prospects.
However, in my view, the rising competition it faces in the real world and in cyberspace — and the threat this poses to its revenues and ultra-thin margins — makes the FTSE 100 firm a risk too far for me.
A better FTSE 100 bargain
I’d much rather invest my hard-earned cash in BAE Systems (LSE: BA). Competition isn’t as problematic for this FTSE 100 share because of its exceptionally long relationships with the UK and US armed forces.
It’s at the cutting edge of defence product design and this makes it a critical supplier to modern militaries. And the company has the scale and the pedigree (for example in submarine building) that pose formidable barriers to entry for almost all other defence companies.
War is a constant theme of human history. This means that demand for BAE Systems’ hardware is always pretty robust, providing the business with great earnings visibility. The outlook for arms spending is particularly strong at the moment too, given the febrile geopolitical atmosphere.
Tensions are high as the Russia-Ukraine situation remains fragile. Concerns over Chinese strategies are testing nerves in the West meanwhile, and fears over North Korea and terrorist threats continue to rumble on in the background.
My main concern with investing in BAE Systems is the ever-present danger of product failure. A high-profile disaster in the field could prove disastrous for future orders. Still, the business has a terrific track record on this front, This has allowed it to forge those solid relationships with London and Washington, while also helping it to win more business in emerging markets too.
Today, the FTSE 100 share trades on a forward price-to-earnings (P/E) ratio of 12 times. It carries a healthy 4.4% dividend yield as well. At current prices, I think BAE Systems could be too good for me to miss.
