What Will J Sainsbury plc’s Christmas Update Tell Us Next Week?

J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) will be the first of our FTSE 100 supermarkets to report on its Christmas trading period, as we’re scheduled to get a third-quarter update on Tuesday 7 January.

It looks like it’s been an interesting Christmas too, as the last-minute rush could push the UK’s annual retail volumes above £340bn, although the price wars have put intense pressure on profits. 

Late faller

It’s relatively recently that Sainsbury’s share price has plunged, losing 42% since November 2013 to 245p, as forecasts suggest a 19% fall in earnings per share (EPS) for the year ending March 2015, followed by a further 12% drop the year after. Despite Sainsbury being the shopping preference for many who want things a little more upmarket, it seems they’re not immune to the attractions of Lidl and Aldi.

Having said that, Sainsbury’s shares are the most shorted on all the FTSE 100 and FTSE 250 at the moment, according to data compiled by Markit. And there are some major hedge funds apparently amongst the short-sellers, which would suggest they consider Sainsbury to be the most overvalued in its sector right now.

Overvalued or undervalued?

And that’s with the price fall putting Sainsbury’s shares on the lowest P/E ratio of the big three, with relatively lowly ratings of 9.4 and 10.7 for the next two year-ends. With forecasts being cut, the punters seem to be expecting Sainsbury’s to be the last to effect a turnaround even though it’s the only one paying strong and well-covered dividends — we’re looking at twice-covered yields of 5.4% and 4.5% if forecasts prove accurate.

For its first half to the end of September, Sainsbury’s reported a fall in underlying sales of just 0.3% with underlying pre-tax profit down 6.3%, but underlying EPS dropped by 12.7% to 14.5p. And in statutory terms, once the one-offs are included, the company reported a pre-tax loss of £290m and a loss per share of 18p.

No recovery yet?

And looking to the longer term, Sainsbury’s said it expects the trend in supermarket like-for-like sales (excluding convenience stores and online shopping) to be “negative for the next few years“.

Although full-year EPS forecasts are steadying at 26p, and despite Sainsbury shares being on a low P/E multiple, there’s a decidedly bearish consensus amongst brokers who expressed a preference. But the biggest group of them are still on a Hold stance, suggesting that they have no more idea of how the sector will go in the next couple of years than the rest of us.

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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.