The Best Reason To Buy J Sainsbury plc

SBRYShares in J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) peaked at 428p last November, but since then they’ve been sliding steadily to today’s 286p. That’s a drop of 33%.

With that kind of fall already behind it, is Sainsbury a good share to buy now?

Although it can always fall further before recovering, I think it’s well worth of consideration.

What went wrong?

But first, the fall is due to the general malaise afflicting the supermarket business, with consumer spending still restrained and cheap alternatives like Lidl and Aldi cleaning up.

That should bring an end to Sainsbury’s run of earnings per share (EPS) growth, with drops of 9% and 3% forecast for the next two years.

Having said that, the year ended March 2014 saw Sainsbury’s underlying sales rise by 2.8%, although like-for-like sales only gained 0.2%. Underlying pre-tax profit was up 5.3% with underlying EPS up 6.5%, and the company lifted its dividend by 3.6%.

A tougher year

But the squeeze is starting to hit, and in the quarter to June, retail sales were up just 1% excluding fuel, down 0.3% including fuel. Like-for-like sales were up 1.1% ex fuel and down 2.4% inc fuel.

In an upbeat sign of the times, Sainsbury saw convenience store sales gain 18% year-on-year, and opened 27 more of them during the quarter.

And the company added the Grocer 33 Customer Service and Availability award (for the second consecutive yea) to the FTSE100 Business of the Year 2013, Supermarket of the Year (Retail Industry Awards, sixth time in eight years), Online Retailer of the Year (Grocer Gold awards, second consecutive year), Convenience Retailer of the Year (Retail Industry Awards, fourth consecutive year) awards and the Gold Accreditation from Investors In People (the only supermarket so far) that it already holds.

Low valuation

With the share price down, even the predicted earnings drop would put Sainsbury shares on a forward P/E of under 10 for each of the next two years — and that’s significantly lower than Tesco.

Dividends are still looking strong, with forecasts suggesting yields of 5.6% and 5.4% this year and next. Actual amounts are likely to fall a little, and we might even see a bigger-than-expected cut to help deal with pricing competitiveness, but coverage is still healthy at 1.8 times.

It’s done nowt wrong

And that brings me to what I think is the best reason to consider buying shares — Sainsbury has done nothing wrong, and surely doesn’t deserve its lowly rating.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.