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Are J Sainsbury plc And Kingfisher plc Ripe For Takeover?

Cash

2014 has been nothing short of a disaster for investors in J Sainsbury (LSE: SBRY) and Kingfisher (LSE: KGF). Shares in the two retailers have fallen by 37% and 24% respectively since the start of the year and, although the FTSE 100 has been weak, its fall of 6% over the same time period is minor in comparison.

However, with shares being so cheap and the two companies continuing to be highly profitable and financially sound, could a bid be on the cards for either stock? Or, is it wishful thinking to think that one or both of these beaten-up retailers is a prime takeover target?

Valuation

Shares in J Sainsbury and Kingfisher are certainly very cheap. For example, J Sainsbury trades at well below net asset value, with it having a price to book ratio of just 0.74. This means that would-be purchasers of the stock are able to buy £1 of net assets for just £0.74, which is hugely appealing.

In fact, it’s even more enticing when you consider that J Sainsbury’s asset base is mostly made up of property, plant and equipment (60% of total assets) and cash (10% of total assets). This means that, while many companies carry large amounts of intangible assets and goodwill on their balance sheets, a potential purchaser of J Sainsbury would be buying tangible assets that could potentially be sold for more than their current price.

Meanwhile, Kingfisher trades just above net asset value, with it having a price to book ratio of only 1.09. Although higher than J Sainsbury’s ratio, Kingfisher also has a very attractive balance sheet. For example, it has a net cash position (which shows it is on a very sound financial footing) and property, plant and equipment make up 37% of its total asset base. As with J Sainsbury, Kingfisher’s balance sheet should appeal hugely to potential investors.

Profitability

Clearly, both companies are experiencing challenging periods. For J Sainsbury the problem is a shopper that has switched emphasis to price in recent years, with no-frills supermarkets such as Aldi and Lidl gaining in popularity. For Kingfisher, a major problem is its large exposure to France and the Eurozone. This is severely hurting its bottom line and means that net profit is set to be 3% lower in the current year.

Looking Ahead

However, both companies have strong future potential. In Kingfisher’s case, the UK continues to be buoyant and, despite France proving to be a problem region for the company, its bottom line is expected to rise by an impressive 12% next year. With shares in Kingfisher trading on a price to earnings (P/E) ratio of 12.9, this equates to a very appealing price to earnings growth (PEG) ratio of around 1.

In J Sainsbury’s case, the joint venture with Netto could help it to turn the tables on Aldi and Lidl though fighting them solely on price. It should also allow J Sainsbury to push its own brand to a higher price point to attract customers that have ditched it for Waitrose. This combination could prove to be highly successful over the medium term.

So, with very cheap shares, highly attractive balance sheets and bright futures, J Sainsbury and Kingfisher most certainly appear to be takeover targets. As a result, their share price performance moving forward could be a marked improvement on 2014 thus far.

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Peter Stephens owns shares of Kingfisher and Sainsbury (J). 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.