The Motley Fool

Should I buy this FTSE 100 stock?

Image: Tesco

The UK stock market has performed well since the Covid-19 sell-off. Investor sentiment has been positive due to the Brexit deal and the successful vaccination drive. The FTSE 100 index has risen about 25% in the past year.

Today, I would like to review Sainsbury’s (LSE: SBRY) to see if it’s a potential buy.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Fundamentals 

The UK food and grocery market demand has been strong. According to researcher Kantar, the over-65s that have been vaccinated have increased their trips to supermarkets. When we look into the February 2021 shopping figures, the UK’s ‘big four’ supermarkets have done well. Looking specifically at Sainsbury’s, sales increased by 12% to hold its market share of 15.6%.

In the interim results, total retail sales grew by 7.1%. The company’s focus on online sales is showing good results. Digital sales were up 117% to £5.8bn: these were approximately 40% of total sales.

The retail free cash flow was positive, which is another reason for me to like this FTSE 100 stock. The management expects full-year profits to be at least 5% higher than the previous year.

Sainsbury’s is restructuring its business. It is closing Argos stores in many cities and plans to accommodate its business through online channels or in existing Sainsbury’s stores. It also plans to reduce the staff and office space in a bid to save costs. 

The multi-brand and multi-channel formats have helped to sustain the competitive supermarket industry. The store’s layout is wide and it makes shopping in Sainsbury’s very easy. The decision to buy Argos is also a good long-term plan, I believe. Argos has a very good brand value, which compliments very well with Sainsbury’s. The delivery or click-and-collect service is very reliable. It has a growing loyal customer base due to the excellent service.

Risks to consider in this FTSE 100 stock

Sainsbury’s has been able to differentiate in the past as a premium offering. However, nowadays consumers are looking for value. As such, it is losing market share to discounters like Aldi and Lidl. The company has recently started an ‘Aldi price match’, which is a good strategy. However, the company’s profitability will be affected. 

The company has benefitted from increased grocery and food usage during the Covid-19 pandemic. There has been a clear shift from the consumer’s spending on pubs and restaurants to supermarkets. However, this demand might slow down when people start going back to offices and outdoors. 

Also, the restructuring of the business will have near-term costs. A lot of Argos stores are being closed. Sainsbury’s is also planning to reduce office space. It is uncertain today how consumers might adjust to this new format.

Conclusion

Sainsbury’s is a fundamentally strong company. The shares are currently trading at a forward price-to-earnings ratio of 12. I believe in the current environment the valuation is cheap. However, I am not a buyer of this FTSE 100 stock today. I will keep the stock on my watchlist since I am not yet convinced that it will overcome the competition in the supermarket sector.

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

Royston Roche 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.