While the UK supermarket sector continues to experience a challenging period, with profits and market share of many of the major supermarket chains struggling to tread water, J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) seems to be the odd one out.
Indeed, it has grown market share and experienced like for like sales growth in recent years that rivals can only dream of. Certainly, it is still struggling to deliver profit growth to rival other sectors but, on a relative basis, it is performing extremely well.
Furthermore, shares appear to be rather cheap at the moment and it looks as though they have scope to reach 470p over the medium to long term.
Moreover, J Sainsbury currently trades on a price-to-earnings (P/E) ratio of 12.5. When the strong performance of the company (in terms of its market share growth and positive sales growth momentum) are taken into account, this looks good value on a standalone basis.
However, when compared to the wider index and to the ‘food and drug retailer’ sector (to which J Sainsbury belongs) it looks even better value.
Indeed, the FTSE 100 currently trades on a P/E of 13.7, while the sector to which J Sainsbury belongs has a P/E of 13.1. Currently, then, J Sainsbury trades on a discount to the wider index of 8.8% and a discount to its sector of 4.6%. This seems to be rather confusing, since J Sainsbury is a high quality operation that is outperforming its peers and offers a decent yield as well as positive growth prospects.
Therefore, it could reasonably be argued that shares deserve to trade on a premium to sector peers (rather than a discount). Even if they were to trade at a premium of just 10% to the sector, it would mean J Sainsbury having a P/E of 14.4, with shares being priced at 470p. This would represent a capital gain of 14.9% and, when a yield of 4.3% is taken into account, it seems as though shares could realistically deliver a total return closer to 20%.
Of course, J Sainsbury continues to experience tough trading conditions but it appears to be doing all of the right things to ensure it stays ahead of the pack. Shareholders may find themselves benefiting from this outperformance, even if the UK economy has another rather flat year in 2014.
> Peter owns shares in J Sainsbury.