Why J Sainsbury plc Has Strong Growth Prospects

The UK’s supermarkets have been struggling for a while, with the notable exception of J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) — although even Sainsbury’s shares have lagged the FTSE over the past 12 months, only gaining around 4%.

Tesco has a pretty hefty 16% fall in earnings per share (EPS) forecast for this year,following on from an 11% drop in 2013, and Wm Morrison Supermarkets has falls of 13% and 4% predicted for the next two years. But alone in the sector, Sainsbury has nothing but growth on the horizon.

Here’s how the three of them square up in terms of EPS growth:

Year Sainsbury Tesco Morrison
2013 +9% -11% +7%
2014* +5% -16% -13%
2015* +6% 0% -4%
2016* +5% +3% +4%

* forecast

Sainsbury has, in fact, recorded five straight years of rising EPS up to 2013, and is, again, the only one of the three to have achieved that.

Best of the bunch

To some extent, Sainsbury’s success has been based on the failings of the others. Tesco’s fall from favour that started with that tough 2011 Christmas, and from which it has still not been able to effect a recovery, will surely have pushed some shoppers in Sainsbury’s direction. And Morrison’s very late entry into the online groceries market will certainly have helped its rivals.

But Sainsbury is clearly doing something right, so what’s this year looking like, so close to final results time?

Good so far

The first half to 28 September produced a 4% rise in sales, excluding fuel, with underlying pre-tax profit up 7%, to £400m. Underlying EPS gained 9.2% to 16.6p and the interim dividend was lifted 4.2% to 5p per share. The company also enjoyed its highest share of the grocery market for a decade, at 16.8%, and at the time had put in 35 consecutive quarters of like-for-like sales growth.

The subsequent third-quarter saw like-for-like sales flat, and Sainsbury told us of a tough period leading up to Christmas — but Christmas week itself was the company’s busiest ever, with more than 28 million transactions. The firm’s own brand products were selling well.

The share price

Sainsbury’s shares were having a good time in 2013 — until November at least. Since a peak that month, we’ve seen a fall of 16%. But that does put them on a forward P/E of a 11 for the year ending March 2014, and that’s at a similar level to Tesco and only a little more highly-valued than Morrison.

It also puts Sainsbury’s forecast dividend yield up to 5% for this year, rising to 5.3% two years out. That suggests undervaluation to me, and I expect to see the Sainsbury share price benefiting from that forecast earnings growth over the coming year.

We should have a Q4 update on 18 March, and full-year results should be with us on 7 May.

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> Alan does not own any shares in Sainsbury, Tesco or Morrison.  The Motley Fool owns shares in Tesco and has recommended Morrison.