Is J Sainsbury plc Still A Buy After The 2013 FTSE Bull Run?

2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it probably has further to run.

Although the FTSE 100 has slipped back from its five-year high of 6,875, which it hit in May, it is still up by 8.8% so far this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) still offer good value, after five years of market gains.

Back to basics

Billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.

Although Sainsbury’s share price has outperformed the market and gained 15% this year, that’s unimportant for today’s potential buyers — we need to focus on what we can get for our money if we buy Sainsbury’s stock today:

Ratio Value
Trailing 12-month P/E 12.8
Trailing dividend yield 4.4%
Operating margin 3.5%
Net gearing 38.0%
Price to book ratio 1.3

Sainsbury’s has outperformed Wm. Morrison Supermarkets and Tesco over the last couple of years, and it shows. Based on the firm’s performance over the last 12 months, I reckon Sainsbury’s shares look good value.

Sainsbury’s P/E of 12.8 is well below the FTSE 100 average of 16.4, and the supermarket’s 4.4% dividend yield is 42% higher than the FTSE 100 average of 3.1%.

Growth expectations

Supermarkets are facing tough market conditions at the moment, with heavy pressure on margins from discounters, and high-end sales leakage to premium contenders Waitrose and Marks & Spencer.

However, Sainsbury’s brand image has always been more upmarket than its main competitors, and I think this will help the firm maintain earnings growth as competition intensifies. My confidence is reflected in current consensus forecasts for Sainsbury’s, which suggest it remains a strong buy:

Metric Value
2014 forecast P/E 11.9
2014 forecast yield 4.5%
2014 forecast earnings growth 10.9%
P/E  to earnings growth (PEG) ratio 1.7

The first three values speak for themselves, but my final metric, the PEG ratio, isn’t something you would normally apply to large-cap mature stocks. I’ve included it here because while Sainsbury’s PEG ratio of 1.7 implies modest future growth, Tesco’s PEG ratio is 10.2 and Morrisons’ is 4.5; Sainsbury’s is still the pick of the bunch in terms of earnings growth.

I believe that Sainsbury’s remains good value. Although its share price may not make huge gains next year, the firm’s rising dividend and steady earnings growth should make it a strong income performer.

Faster growth?

On the other hand, one sector where big changes are afoot, and share prices could make big moves, is the banking sector.

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> Roland owns shares in Tesco, but does not own shares in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.