3 Reasons Why J Sainsbury plc’s Results Could Make Wm. Morrison Supermarkets plc A Buy

Sainsbury’s (LSE: SBRY) full-year figures were something of a mixed bag. On the one hand, underlying profit increased by an impressive 5.3%, while sales growth continues to be rather sluggish – as evidenced in the company reporting like-for-like sales growth of just 0.2% for the full-year.

Despite this, J Sainsbury seems to be in a relatively strong position. That’s because it appears able to differentiate itself from many of its peers through offering competitive pricing, but also selling itself on the quality of its products, too. This is especially true for its own-brand products, which tend to be viewed as being of a higher quality than many of its peers and, encouragingly for J Sainsbury, usually offer far higher margins than many of its branded products.

SBRYA Challenging Sector

Of course, the supermarket sector is highly competitive and, although J Sainsbury now has its highest share of the sector in a decade at 16.8%, the outlook is tough. A possible takeaway from this is that companies such as Morrisons (LSE: MRW) are not facing company-specific problems, but rather are being hampered by sector-specific challenges. In other words, shares in Morrisons are being heavily marked down by the market when in actual fact it is challenging trading conditions that are holding the company back, rather than specific problems at the business. As with all sectors, there will naturally be an ebb and flow to performance over time, so now could be a good time to invest in the less popular stocks in an unloved sector.

Growth Potential

However, growth is still on offer, as shown by J Sainsbury’s online and convenience stores — they grew sales by 12% and 19% respectively for the full-year. This is where sector peer Morrisons has the potential to outperform its rivals. Unlike J Sainsbury, Morrisons has only recently offered an online grocery service (which will gradually become available to London and the North West of England) and is in the process of rolling out its convenience store format — a process which gathered pace last year. Both of these areas, while requiring significant capital expenditure in the short run, could help to deliver improved growth for Morrisons, as they have done for rivals such as J Sainsbury.

Looking Ahead

As alluded to, the share price of Morrisons has been hit harder than many of its peers of late. For instance, it is currently down 27% in 2014 while J Sainsbury is down over 10% year-to-date. This highlights the difference in sentiment between the two stocks but also presents an opportunity for longer term investors, with Morrisons appearing to offer better relative value than J Sainsbury.

Indeed, Morrisons trades on a price to earnings (P/E) ratio of 7.6 while J Sainsbury’s P/E is currently 9.9. While both companies seem to offer good value for money, Morrisons has the potential to expand online and into convenience stores, has been hit hardest in 2014 and has the lower P/E, meaning it could have more scope to make gains in future years.

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Peter owns shares in J Sainsbury and WM. Morrison. The Motley Fool has recommended shares in Morrisons.