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Why the Sainsbury’s share price rose 11.7% in September

Has the J Sainsbury (LSE: SBRY) price finally bottomed out and returned to growth? There are some signs of hope.

After hitting an all-time low of 177p on 15 August, SBRY stock had already risen 10% to 196p by the end of August. The shares continued to rise in September, logging an 11.7% gain over the course of the month. As I write, the shares are changing hands for 205p.

In this article I’ll explain why investors are looking at this stock with fresh hope — and why I still have some concerns about the outlook for shareholders in this 150-year-old business.

What’s changed?

The supermarket chain’s shares have fallen by more than 30% over the last year as it’s reported falling profits and lower margins.

Since the group’s planned merger with Asda was blocked by the regulator in April, investors have been waiting to see what chief executive Mike Coupe will do next. In September we found out. Mr Coupe plans to stay focused on the core grocery business and cut costs across the group by £500m over the next five years.

Sainsbury’s store estate will also get a revamp. Around 10 new supermarkets are planned, offset by 10-15 closures. A similar mix of openings and closures will be made to in-store Argos concessions and to the convenience store estate.

Finally, Sainsbury’s Bank will stop offering mortgages and will be managed to improve profitability. The bank’s new boss, Jim Brown, has been told to double its underlying pre-tax profit and lift returns on capital to more than 10%.

The bank is not expected to receive any further cash injections from the group after this year. Indeed, it’s expected to start returning cash to the group.

My view

These planned changes all sound sensible to me. Funding this programme will be made easier by a £50m reduction in annual pension contributions. The company also hopes to raise between £270m and £350m from property development projects on surplus land.

My guess is that the group’s financial services division, which includes the bank, will aim to boost its profit margins by focusing on more profitable consumer lending, including customer credit for Argos shoppers.

However, despite all of this promise, it’s worth remembering that Sainsbury’s continues to face pressure to price-match discounters Aldi and Lidl while maintaining a more upmarket feel. It’s not an easy balance to achieve.

Should you buy or sell Sainsbury’s?

Sainsbury’s is currently the least profitable of the big supermarkets. It lacks the wholesale food operations that have helped Tesco and Morrisons return to growth. And it doesn’t have the buying power of Tesco or the high level of freehold property ownership enjoyed by Morrisons.

In my view, the shares are priced about right at current levels. Trading on 10.5 times forecast earnings with a 5% dividend yield, I’d rate the shares as a hold, at best. I think there’s still a significant risk of further disappointment, so I would prefer to wait for signs of progress before considering a buy.

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Roland Head owns shares of Tesco. 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.