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Why the Sainsbury’s share price could soar higher than the FTSE 100

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The last three months have been hugely positive for investors in the FTSE 100. The index has risen by around 8% as investor sentiment has continued to improve following a difficult period earlier in the year.

However in the same period, Sainsbury’s (LSE: SBRY) has been able to significantly outperform the wider index. It has gained 33%, with investors seemingly becoming more interested in the stock due in part to its proposed combination with Asda.

Looking ahead, further outperformance could be ahead, with the retailer appearing to offer investment potential alongside a smaller company that reported a positive update on Monday.

Improving position

The supermarket sector has experienced a period of major change in recent years. Shopping habits have evolved, with online and convenience stores becoming more popular at the same time as out-of-town supermarket sites see footfall decline. Alongside this, consumers have become increasingly price-conscious, with pressure on real household incomes contributing to a fall in consumer confidence.

As a result, consolidation within the industry is not a major surprise. However, the tie-up between Asda and Sainsbury’s could lead to a competitive advantage for the combined entity. It may be able to enjoy lower costs, with synergies from the deal expected to be at least £500m. A lower cost base may also provide margin support at a time when major supermarkets continue to invest in price, and this could have a positive impact on the company’s future profitability.

With Sainsbury’s trading on a price-to-earnings growth (PEG) ratio of 2, it may appear to now be fully valued after its recent gains. However, with its profit growth potential over the medium term having the potential to improve significantly as a result of the deal, it would not be surprising if the stock market continued to upgrade its valuation.

Growth potential

Also offering the potential to beat the FTSE 100 is niche specialist services provider Premier Technical Services (LSE: PTSG). It released an upbeat trading statement on Monday which showed that sales growth and strong levels of orders have been recorded in the year to date. Organic growth remains positive, with contract renewal rates still high, while the acquisitions completed last year are contributing to overall growth.

Looking ahead, Premier Technical Services is forecast to post a rise in its bottom line of 13% in the current year, followed by further growth of 11% next year. This puts it on a PEG ratio of 1.5, which suggests it offers a wide margin of safety.

The company appears to be in a strong position to deliver further acquisitions. Alongside the potential for repeat business and winning new customers, this could mean that share price growth is ahead. After rising by 31% in the last year, the stock could move to a higher price level over the medium term.

Capital Gains

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Peter Stephens owns shares of Sainsbury (J). The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.