You’d have to braver than me to tip high street grocer J Sainsbury (LSE: SBRY) right now, given the many struggles it faces. Yet some investors are getting excited about it, with the share price jumping almost 12% over the past week. Is this the start of an unlikely recovery?
Trouble in store
The Sainsbury’s share price has struggled for years and fell another 42% over the past 12 months against a relatively minor drop of 8% across the FTSE 100. The £4.35bn group has been hit by wider economic and political uncertainty but has also suffered its own disappointments, such as the failed £7.3bn tie-up with Asda, and a 29% drop in pre-tax profit to £219m, announced in May.
Perhaps the share price fell so low that it had to rebound? It is more likely that investors were responding to reports that the company is working on a succession plan to replace CEO Mike Coupe, as it looks to move on from its Asda disappointment. That failure does call his judgement into question, as the Competition & Markets Authority was always likely to block the merger due to the impact on choice and prices, and Coupe wasted a lot of time and money finding out for sure.
If Couple does go (in May he said he would stay), his legacy will be a reasonably successful £1.4bn acquisition of Argos, but Sainsbury’s remains a business in retreat and its stores and brand image seem in urgent need of an overhaul to me.
This could be an opportunity for contrarians, so is now the time to fill your trolley?
While Brexit has had a silver lining for many FTSE 100 stocks, it has clouded the supermarket sector, which enjoys little benefit from the weaker pound. As a domestic-facing business, Sainsbury’s has to deal with rising import costs and cash-strapped consumers instead.
In a rare piece of good news, Sainsbury’s saw its market share climb slightly over the 12 weeks to 11 August, from 15.3% to 15.4%, according to Kantar Worldpanel, while Tesco and Morrisons each saw their market share dip by 20 basis points, to 27% and 10.1% respectively.
However, Sainsbury’s still saw its sales drop 0.6%, and although this was smaller than Tesco (1.6%) and Morrisons (2.7%), the fact that Aldi’s sales grew 6.6% and Lidl’s by 7.2% shows the scale of the continuing challenge.
Sainsbury’s trades at a discounted price of just 9.8 times forward earnings, way below the P/E of 17.33 across the index as a whole, while it also has a lowly price-to-revenue ratio of 0.2. It is a tempting income stock, with a forecast yield of 5.4%, covered 1.9 times, against 4.72% across the FTSE 100.
Its customers could be feeling slightly better off, with wages up 3.9% in the year to June, the highest for 11 years, while the unemployment rate is the lowest since 1971. The group may also recover some of its mojo, as Asda scars heal.
So now could be a buying opportunity, but this wouldn’t be top of my list of FTSE 100 buys. There are other bargain dividend stocks I’d consider first.
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Harvey Jones has no position in any of the shares mentioned. 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.