Why J Sainsbury Plc Looks A Bargain Buy Today

SBRYI have lost my taste for investing in the supermarkets lately, after years of poisonous performance. J Sainsbury (LSE: SBRY) has been the best of the big four, but its share price is still down a wretched 2% over the past five years, against a 50% rise in the FTSE 100. But suddenly I’m getting my appetite back.

After falling nearly 20% in six months, Sainsbury’s has been heavily priced down. All the major supermarkets have, especially Tesco and WM Morrison, but they are now showing signs of recovery. Last week’s news that Asda trimmed customer losses to discounters Aldi and Lidl has improved sentiment across the sector. If the fightback continues, now could be a good time to take Sainsbury’s to the tills.

First, you have to decide whether the big supermarkets have a future. They have been under sustained attack for years, as cash-strapped customers abandon the big boys for cheap German imports, and the better-off head to Waitrose, where they may bump into the Prime Minister. But the big four are still making money. Sainsbury’s, for example, has just posted profits before tax of £798 million, up 5% on £758 million in 2012/13. 

King Abdicates

This positive result confounded forecasters, who were unduly pessimistic about the prospects for Sainsbury’s. Like-for-like sales did fall 3.1% in the fourth quarter, but still rose 0.2% across the year. Sainsbury’s isn’t dead yet.

It does face peril on several fronts, however, with chief executive Justin King stepping down in July, and Tesco, Asda and Morrisons threatening to drag it into a price war. But I still fancy Sainsbury’s over Tesco, which has a massive image clean-up and turnaround job on its hands, and Morrisons, which is desperately trying to defeat the discounters on price without looking like a budget proposition itself.

Priced To Sell

Sainsbury’s is self-confident enough to compete on more than just cost. It retains a reputation for quality, which the consumer may increasingly seek out if the economy continues to recover. Trading at 10 times earnings, its share price is in bargain territory, especially given relative outperformance. A 5% yield should keep you amused until the sector finds its feet.

I hope it stands aloof from the price war, and retains its upmarket edge on Tesco, Asda, Morrisons and the German discounters. Time will tell whether Sainsbury’s is occupying the higher ground or squeezed middle territory. But if you still have faith in the British supermarket (and consumer), and are looking for quality at a fair price, Sainsbury’s may be the best place to get it. Especially when those World Cup promotions kick in.

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Harvey doesn't hold shares in any company mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.