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Why J Sainsbury plc Could Soar By 30%!

It’s of little surprise that shares in J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) have fallen by 29% in the last year. After all, the company is struggling to overcome the sky-high competition of the supermarket sector, with no-frills operators such as Aldi and Lidl hurting its bottom line.

In fact, Sainsbury’s profitability is set to fall even further during the course of the next two years, with forecasts putting it 22% lower in the current year, and a further 13% down next year. This means that,  just two years from now, Sainsbury’s profit looks set to be just two-thirds of what it was last year.

Despite this apparently dire outlook, Sainsbury’s shares could be worth a whole lot more than they are right now and, as a result, could be worth buying at the present time.

Valuation

With investor sentiment in the wider supermarket sector declining significantly in recent months, shares in Sainsbury’s now trade on an extremely low valuation. For example, even if we take into account the aforementioned forecast falls in the company’s bottom line over the next two years, Sainsbury’s still has a price to earnings (P/E) ratio of just 11.6. That’s low on an absolute basis, but seems to be even better value when you consider that the FTSE 100 has a P/E ratio of 15.1.

In fact, if Sainsbury’s were to trade on the same P/E ratio as the FTSE 100, it would mean its shares being priced at around 337p. And, with them currently trading at just 259p each, this would equate to a rise of just over 30% over the medium term.

Looking Ahead

Cleary, such a rise is unlikely to happen overnight but, when you consider that its shares are up 8.5% in the last month and that sector peer, Tesco, has seen its share price increase by 28% in just the last three months, a 30% rise in over the medium term does not sound so unlikely.

Certainly, investor sentiment will need to improve significantly but, with the UK economy moving from strength to strength and inflation falling to below the rate of wage growth, UK consumers may subconsciously find that price is a less important factor when they are buying groceries, clothing and other staple items. Such a situation would help Sainsbury’s hugely and could provide the company with a brighter outlook, improved investor sentiment, and a share price that is 30% higher than its current level. As such, now could be a great time to buy a slice of Sainsbury’s.

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Peter Stephens owns shares of Sainsbury. 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.