Why J Sainsbury plc Should Lag The FTSE 100 This Year

SBRYWe know why Tesco has fallen — a disastrous Christmas season in 2011 turned into a lengthy fall in profits as the UK’s largest seller of groceries just couldn’t keep attracting the customers. Not to mention the recent accounting scandal.

And Morrison has been laggardly for years, only recently getting online shopping going and finally recognizing the value of multi-format stores.

But it’s hard to see what J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) has done to deserve a 36% fall in its share price so far in 2014 to 237p, while the FTSE 100 has only dropped by 8% — especially as the supermarket recently won five awards at the Retail Industry Awards to add to its many wins over the past few years.


The truth is that the recession has left people with a far more critical attitude to food prices, and with Lidl and Aldi talking full advantage, there’s a big price war going on — it’s what’s called a “deflationary environment” in company-speak, and Sainsbury highlighted it in its second-quarter trading update.

For the 16 weeks to September, like-for-like retails sales were down 2.8% excluding fuel, and 4.1% including fuel. And for the half, we saw a 2.1% like-for-like fall excluding fuel, and 3.4% including fuel.

As an aside, I remarked a few years ago that I was surprised my local Aldi had so few customers, but it struck me recently that it’s always packed these days. As a regular visitor, I hadn’t noticed the number of shoppers gradually increasing — and it seems the UK’s dominant supermarkets hadn’t either.

Anyway, analysts are forecasting a 15% fall in earnings per share (EPS) for Sainsbury for the year to March 2015, with another 8% dip expected the following year.

What to do?

But what should we, as investors, do about it?

Those forecasts put Sainsbury shares on a forward P/E of about 8.5 for the current year, and a still-modest 9.3 the year after. Whether that proves to be cheap will depend on how EPS goes in the subsequent years, but if you think the next year or two will see the bottom passing, then we could be looking at a nice bargain now. In fact, the price has blipped up a little recently, so maybe Sainsbury’s initiatives like its tie-up with Jessops is providing a little optimism?

If dividend forecasts hold, we should see a yield close to 6% this year, dropping to 5.6% next. But with Tesco already having slashed its dividend to help fund its price war, there has to be some doubt here. But forecasts are twice-covered, and there’s room for a cut while still delivering an above-average yield.

Could be time to buy

Brokers’ recommendations are split, with most on the Hold fence — and I can’t criticize them for that right now. But if we’re not at the bottom for Sainsbury shares at today’s price, surely we can’t be far away from time to buy, can we?

A well-balanced portfolio chosen from a number of sectors really is the best way to build yourself a healthy retirement pot, but should Sainsbury be one of them?

You have to decide for yourself, but the Motley Fool's latest analysis of Five Shares To Retire On should give you some welcome help. It covers five very solid blue-chip shares and tells you why our experts think they'll serve you well in the decades ahead!

The report is free for a limited time only, so click here to get your personal copy today.

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