Tesco PLC Inadvertently Makes J Sainsbury plc A Buying Opportunity


Right when it felt as though things couldn’t get much worse for investors in Tesco (LSE: TSCO), the company announced that an accounting error had caused profit to be overestimated by around £250 million.

As you’d expect, shares in the company have fallen heavily (upwards of 10%) since the announcement. Furthermore, sector peer Sainsbury’s (LSE: SBRY) has also seen its share price drop by 6% in the wake of Tesco’s announcement and in the midst of a weak wider market.

For investors in Sainsbury’s, though, the future still looks bright and the drop in its share price (which is at least partly caused by its rivals’ announcement) means that a buying opportunity could be on offer. Here’s why.

A Sound Strategy

Sainsbury’s has a new strategy through which it hopes to mount a sustained fight back against no-frills supermarkets such as Aldi and Lidl. Indeed, it recently announced a joint venture with Danish retailer Netto that will allow it to compete with discount retailers on the one hand, and leave the Sainsbury’s brand to fight the higher price point food retailers such as Waitrose.

This strategy is essentially a split of the Sainsbury’s brand and seems to be a more sensible option than attempting to compete on price, as the likes of Tesco have done. It avoids the dilution of the Sainsbury’s brand, which has taken a long period of time to build into a respectable, quality name.

An Improving Economic Outlook

The Sainsbury’s brand should have a more prosperous future than it has experienced in the recent past. With inflation being higher than wage growth for a number of years, it is unsurprising that shoppers are feeling the pinch. However, with wage rises set to be ahead of inflation through 2015, shoppers could have higher disposable incomes and seek out better quality products and a higher level of service, thereby returning to shop at Sainsbury’s from Lidl and Aldi, for instance. This would clearly be good news for Sainsbury’s top and bottom lines.

Looking Ahead

Although Tesco has overstated profit by a considerable amount, there is nothing to suggest that this is a sector-wide problem. Yet, Sainsbury’s shares have fallen heavily since the news. This creates an opportunity for brave investors who are comfortable with a degree of volatility moving forward.

With Sainsbury’s currently trading on a price to earnings (P/E) ratio of just 9.4 and yielding 5.8%, it appears to offer great value and huge income potential. Certainly, there will be lumps and bumps ahead, with the latest data from Kantar showing that its market share has slipped from 16.6% to 16.2%. However, with a sound strategy, an improving macroeconomic outlook, low share price and well-covered dividend, Sainsbury’s could prove to be a great long-term buy.

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Peter Stephens owns shares of Tesco and J Sainsbury. The Motley Fool owns shares in Tesco.