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Is J Sainsbury plc A Better Buy Than Dunelm Group plc And Home Retail Group Plc?

It’s been a hugely disappointing year for Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US), Dunelm (LSE: DNLM) and Home Retail (LSE: HOME), with the three UK-focused retailers seeing their share prices decline significantly during the period. In fact, Sainsbury’s has seen its share price fall by 14%, while Dunelm and Home Retail have slumped by 13% and 24% respectively, as investor sentiment has declined for all three companies.

Looking ahead, though, which of the three has the brightest prospects and, crucially, offers the best value at the present time?

Growth Potential

For investors in Sainsbury’s, things are about to get worse before they get better. In fact, even though the supermarket has shifted its pricing strategy to generate higher margins on its own branded products, its bottom line is still set to fall in the current year by 14%, as a challenging outlook for the wider sector still harms its sales and profitability. And, looking ahead to next year, Sainsbury’s is only expected to deliver a slightly improved performance, with net profit forecast to rise by just 1% in 2016, which means that investors in the company may have to wait a while before investor sentiment begins to pick up strongly over a prolonged period.

Meanwhile, Dunelm and Home Retail have much brighter near-term futures when it comes to earnings growth. For example, Dunelm is expected to increase its bottom line by 8% next year and by a further 9% the year after. This is slightly higher than the wider market’s growth rate and shows that Dunelm looks set to benefit from an improving outlook for the UK consumer, as wage rises are due to beat inflation for the first time since the start of the credit crunch.

Similarly, Home Retail is forecast to increase its earnings by 6% in the current year, followed by 7% next year. This is also an impressive outlook and means that investor sentiment in both stocks is likely to be stronger than for Sainsbury’s.

Valuation

However, the problem with Dunelm and Home Retail is that their bright futures appear to be more than adequately priced in to their present valuations. In other words, they seem to be rather richly valued. For example, Dunelm has a price to earnings (P/E) ratio of 20.2, which equates to a price to earnings growth (PEG) ratio of 2.3. Similarly, Home Retail has a PEG ratio of 2.3, which indicates that its shares may not perform as well as its investors are hoping for over the medium term.

In Sainsbury’s case, however, its P/E ratio of 12.2 appears to be relatively appealing when the FTSE 100 has a P/E ratio of around 16. Furthermore, and despite the prospects for asset write-downs over the next couple of years, Sainsbury’s still trades at a discount to net asset value (it has a price to book (P/B) ratio of just 0.8) and this indicates that its share price could move significantly higher in the medium to long term.

Looking Ahead

So, while the last year has been very disappointing for its investors, Sainsbury’s still offers significant upside. Certainly, it may take time to come good but, to a far greater extent than Dunelm and Home Retail, its shares offer excellent value for money and seem to be worth buying at the present time.

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Peter Stephens owns shares of 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.