Over the past 12 months, the J Sainsbury (LSE: SBRY) share price has taken a real hammering. The stock has fallen a staggering 28.6% excluding dividends since the beginning of May last year, compared to a decline of just 1% for the FTSE 100.
What’s even more shocking is the fact that shares in Sainsbury’s have underperformed those of Tesco, its larger peer, by around 34% over the same timeframe excluding dividends (Tesco has outperformed the FTSE 100 by 5% excluding dividends).
The question I want to answer today is whether or not this trend is set to continue or if the Sainsbury’s share price can make a comeback this year?
Three years ago, it would have been inconceivable to imagine that the Tesco share price would ever outperform that of Sainsbury’s by more than 30% over the space of just 12 months.
But a lot has changed since 2016. Tesco has undergone a remarkable transformation, while Sainsbury’s has floundered. The group’s CEO, Mike Coupe had staked everything on the firm’s merger with Asda, believing that this was the solution to all of the company’s problems.
Unfortunately, while management chased this deal, competitors have continued to chip away at the company’s market share and sales.
According to Sainsbury’s latest trading statement, for the 15 weeks to 5 January 2019, total retail sales declined 0.4% excluding fuel, and like-for-like sales fell 1.1%. One day after the company released this downbeat statement, Tesco revealed sales growth of 2.2% on a like-for-like basis for the 19 weeks to 5 January 2019.
Now that the Competition and Markets Authority has rejected the deal with Asda, it is challenging to try and predict what the future holds for Sainsbury’s.
As noted above, it has put all of its time and resources into trying to complete what it believed would have been a transformative deal. Now it has been blocked from completing the process, management is back to square one, and it doesn’t look as if it has a plan to return the company to growth.
That being said, the City has pencilled in earnings growth of 11.6% for 2019, which puts the stock on a forward P/E of 10.9. That looks cheap compared to Tesco’s P/E of 14.1, although I should point out that Sainsbury’s sales are falling while Tesco’s are still growing, which deserves a lower rating in my opinion.
Time will tell
Sainsbury’s is planning to release its annual numbers tomorrow, and the company should publish its plans to return to growth at the same time.
A lot hinges on these results. The company needs to convince investors that it has a plan to return to growth, and if it fails to do this, then I think the shares could fall further in the near term.
A dividend yield of 4.7% does provide some support for the shares, but ultimately the company’s outlook depends on its ability to rekindle sales rises. It could be some time before these return so I think it is probably worth avoiding the business for the time being.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Tesco. 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.