Are J Sainsbury plc, Debenhams Plc And Interserve plc Cheap For A Reason?

Shares in support services company Interserve (LSE: IRV) have risen by around 2% today after it released an encouraging set of full-year results. Revenue increased by 10%, with earnings per share rising by 15% as Interserve’s long-term plan to create a broader and stronger business continues to bear fruit.

Although it expects no growth in profit during the 2016 financial year as a result of slower order intake following the election year and the impact of the living wage, Interserve anticipates a return to growth in 2017. And as evidence of its confidence in the long-term outlook for the business, Interserve has raised dividends by 6%, which puts it on a yield of 6.3%.

With shares in Interserve trading on a price-to-earnings (P/E) ratio of just 6.5, they offer exceptional value for money. Certainly, the next year may be a rather challenging one for the business, but with 2017 due to be a better year, Interserve seems to be a highly appealing value play for long-term investors.

Out of fashion

Also trading on a low valuation is Debenhams (LSE: DEB). It has a P/E ratio of just 9.9 despite having returned to earnings growth in the last financial year and being expected to post positive profit growth in 2016 and in 2017.

Clearly, Debenhams has endured a challenging period that included profit warnings and disappointing sales performance as it lost out to discount operators. However, with the company now focused on margins rather than sales, its profitability looks set to improve over the medium-to-long term. And with UK consumers experiencing real rises in wages, consumer spending levels should remain robust over the coming years.

Allied to Debenhams’ low valuation and bright growth prospects is a dividend yield of 4.6%. This is covered over twice by profit and should prove to be relatively resilient even during a difficult period. As such, now seems to be a good time to buy shares in Debenhams.

Bargain buy?

Meanwhile, Sainsbury’s (LSE: SBRY) is also dirt cheap at the moment, with its shares having a P/E ratio of just 11.6. A major reason for this is the state of the UK supermarket sector, which continues to offer little opportunity for margin expansion and remains a highly competitive space, with Aldi and Lidl expanding further as they seek to grab market share from mid-tier operators such as Sainsbury’s.

However, Sainsbury’s is attempting to respond to the changes in the supermarket space by diversifying its business through the purchase of Home Retail. If it happens, this should provide it with considerable cross-selling opportunities and could revitalise the company’s operations through synergies. And with Sainsbury’s due to return to growth in the 2018 financial year, now could be a good time to buy it ahead of markedly improved financial performance. That’s especially the case since it has a yield of 4.3% which is covered more than twice by net profit.

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Peter Stephens owns shares of Debenhams, Interserve, 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.