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Tempted by the Sainsbury’s share price? Let’s examine the facts

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In sport, there is a term for a ball given to a player who is then likely to be tackled heavily from all directions. The hospital pass. Something akin to the inheritance given to Simon Roberts when he took over as CEO of Sainsbury’s (LSE: SBRY) in June from outgoing chief Mike Coupe: share price down over 20% in the preceding five years, and a perhaps surprising decision to defer a dividend given that analysts could see no obvious net cash cost from the Covid-19 crisis. The short sellers have also been making eyes at the retailer: as I write, the shares are the fourth most shorted on the market.

Sainsbury’s share price – recovering or ailing?

My Foolish colleague Karl Loomes argued in April that the shares appeared oversold. In my eyes, market sentiment has been against Sainsbury’s for some time now. Its share of the UK grocery market has declined from around 17% at peak to 14.9% currently, whilst the expensive failed merger with Asda dented confidence in the group management. Although the pandemic has led a surge in grocery demand, this has been through the less profitable channel of online sales. Analysts also expect around £500m of pandemic related costs, forcing a delay in store investment.

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It is also interesting to note that Sainsbury’s depends heavily on non-food sales, driven mainly by its acquisition of Argos. This element of choice purchases by consumers leaves it more vulnerable to the economic downturn that we now find ourselves in.

The final dose of bad news for investors comes in the form of the ailing bank. After requiring significant capital injections over the last two years, the expectation is that a further £350m could be needed to cover bad debts and write-downs until 2023. The period of historically low interest rates also makes generating profit from banking difficult.

Foolish summary

Given these significant headwinds, I can’t see any basis for investment, so I’m avoiding the Sainsbury’s share price for now. Indeed, it has declined further since the April examination.

However, if you do like the look of the supermarket sector in general, long-serving Fool contributor Peter Stephens touched upon Morrisons earlier this month. I see reasons to be optimistic in its latest trading statement.

The share price is nearly identical to Sainsbury’s, but Morrisons is yielding a superior dividend, and has lifted its interim payout by 5.7%. Although half year profits fell significantly, the rise in like-for-like sales excluding fuel sat nicely at 8.7%, leaving it well placed to focus on improving profitability. Similar to Sainsbury’s, a portion of this growth was through the online channel, but crucially Morrisons is starting from a smaller online and delivery presence than its rivals, and as such has more room to grow. The strengthening of its relationship with Amazon also gives more room for expansion in this area.

In announcing expectations of improved free cash flow, reduction in net debt and underlying pre-tax profit, I see a momentum in Morrisons that Sainsbury’s lacks, and as such the former’s shares are worth a very close look from potential investors in my opinion.

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Ben Watson holds no position in any share mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has no position in any of the companies 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.