Does J Sainsbury Deserve To Be A Super Stock?

28th Mar by Roland Head

12 comments 2213 reads

The UK’s second-largest supermarket trades at a discount to book value and offers a 5% dividend.

Shares in J Sainsbury (LON:SBRY) have fallen by around 15% since the start of the year, but trading seems solid and Stockopedia’s algorithms rate this retailer as a Super Stock.

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With full-year results due in April, I think it could be a good time to take a closer look at this business.

Summary

Pros:

Improved performance and market share
Asset-backed balance sheet, debt reduced
Good cash generation supports 5% yield

Cons:

This is a low-margin and highly-competitive sector
No specific targets for improved profitability
Has disappointed investors before

Profile

About the stock

J Sainsbury is a supermarket chain operating across the UK. It’s classified in the Consumer Defensives sector, within the Food & Drug Retailing industry group.

Sainsbury’s floated on the London market in 1973 and is now a member of the FTSE 100, with a market cap of £5.9bn and a recent share price of 248p.

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The StockRanks show high scores in all three factors for Sainsbury, combining to give a high StockRank and style rating of Super Stock. This suggests Sainsbury’s could currently offer attractive quality and value metrics, with a positive outlook for earnings:

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About the opportunity

Sainsbury’s has been performing well operationally, gaining volume share from rivals and strengthening its balance sheet.

Meanwhile, third and fourth-placed Asda and Morrisons have underperformed somewhat. Both are also under pressure from high debt loads following recent takeovers.

Sainsbury’s shares appear to be reasonably valued, trading close to book value and offering a useful 5% dividend yield. If the company can capitalise on the relative weakness of its key rivals and deliver a sustainable improvement in margins, I think this stock could benefit from a re-rating.

Business & Model

What is the company’s history and what does it do?

J Sainsbury was founded by John James and Mary Ann Sainsbury in 1869, with a single store on Drury Lane in London selling milk, eggs and butter.

Rising living standards in the capital at that time meant there…

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davidallen77

28th Mar

Risks are Argos containers being transported via the cap and not red sea or Suez canal, just in time ordering just to late for Christmas?!

yadi

Thanks Roland for a very comprehensive review of Sainsbury which I found most interesting. I am , however, at a loss to figure out why similar retailers in US are performing so much better. I have an interest in Costco and at whatever angle I look and compare Costco with Sainsbury or Tesco ,over any time frame, I find a stark contrast between them. I am therefore, more inclined to invest in Costco, however expensive it appears to be valued, than any similar retailers in UK. Walmart also has performed better than any UK supermarket and it did not find it easy to make money out of UK stores and eventually sold ASDA which became part of Walmart some years ago.

Mark Carter

I bought TSCO in March 2022 at 288p when it's stock rank was about 90. I sold again in April 2023 at 265p, after realising it was a pretty lousy company. I'm glad I did. Approximately, TSCO has gone up 12% since then, whilst the shares I replaced them with went up 28%. They were simply much better companies with much better growth prospects.

SBRY has had returns on capital averaging 4%. Nasty. Don't buy SBRY, it's a rubbish company, would be my advice.

sevenmonks

I find it hard to see Sainsbury's as a stand out retailer. All the shops I go to have the same problems. They've cut staffing to the bone - the other day I was in a pretty large Sainsbury's store that was being staffed by a grand total of 2 people. Their fresh produce is absolutely awful as well, the amount of visibly mouldy produce on the shelves is shocking but I see it at every sainsburys I go to. The staff just seem to leave it, perhaps a bi-product of the lack of staff.

They also occupy a pretty difficult segment of the market squeezed between cheaper retailers like lidl and higher quality retailers like M&S (which looks like a much better quality company to me, making similar profits off a third of the revenue).

In my opinion the quality of their offering has deteriorated while competition has increased, I find it hard to see the investment case here.

Butch5amue1

I am retired and do all my own shopping. Covid made me revert to using traditional green grocers and butchers and I have not reverted back due to better quality. Sainsbury's is my nearest supermarket and the most used. However, I get frustrated and annoyed by the periodic empty shelves of key items and queues. Check-out isles seemed to be managed to annoy customers and maintain queues. On two occasions since Covid I have abandoned my full trolley and walked out in disgust. I am quite content to queue if they are busy and doing their best but often the reason for queues is inadequate staffing and poor staff deployment. Nothing like the active queue buster mentality in days of yore. Also the toilets tend to be dirty, not infrequently in bad repair and occasionally even out of order. Twenty years ago my view was definitely go to Sainsbury's for quality and a good shopping experience. Apart from staff friendliness this has been lost. There is also the issue of increasing pilfering - not Sainsbury's fault but it must be worrying for a low margin business.

29th Mar

Time for me to have a bit of a moan, but about TSCO, as it happens. In our local store, one of the automatic front doors is stuck. Their bread-making machines broke down a few weeks ago. They repaired it, but now it is broken again.

I'm also puzzled by their lack of popular branded goods. I used to like Warburtons muffins, but they stopped selling them. The alternative they provide are their own brand and a locally-produced one. Both are terrible. They didn't stock Walls ice cream last time.

Kenco Rich is only sporadically available. They have plenty of alternatives, but I guess it is popular and sells out quickly. I'm not FMCG expert, but I would have thought logic would dictate that you stock more of the stuff that people want, and less of the stuff they don't.

And toffees. Where did they go?

Very poorly managed, in my opinion. Oddly, the rivals seem no better. I would have thought that TSCOs missteps would have been the perfect opportunity for them to increase their trade, but they just seem to copy the mistakes of the big stores.

Cricketfan

Thanks Roland. A thought provoking review.

I confess to being a disloyal shopper. No Asda or Morrison near my home but I use all the others from time to time. Ocado too.

I find all three of my local Tesco full size stores to be quite good and I have no complaints there. Sainsbury’s however are all too often sold out of my favourites lines. Waitrose is OK but pricy and not as good as once was due I suspect to downstaffing. M&S may be expensive but is consistently good. My very local mini Co-Op supermarket gets often surprises and deserves good points for last minute shopping.

I don’t hold any of the pure play supermarkets at present but do hold M&S and I think I will avoid all the others for the time being. Better returns and outlooks elsewhere..

topvest

31st Mar

Thanks Roland, an excellent summary. I am a loyal Sainsbury customer and think they are excellent. The Sainsbury family have also given a lot back through their charitable trusts. I would gladly buy the shares, if they were an attractive proposition particularly given their reasonable dividend yield. However, I cannot bring myself to invest for the reasons you highlight. Most importantly, the return on capital is too low and well below 10%. Returns in food retailing across the board are probably lower than the actual cost of capital given the competition. Supermarkets are great places for customers and staff, but not so good for shareholders!

Chipspa

2nd Apr

Whilst the stockranks system is generally a reasonable high level indicator of a shares qualities, it does have its failings. IMO the stockrank must only be used as a precursor to further research. Sainsbury's 95 Super Stock rank is really misleading and an example where people should be made aware of the systems shortcomings. I dont think this article is forthright enough about this.

Stripping everything else aside, the ROCE for Sainsbury is clearly lower than its cost of capital, meaning that it is losing value / money for every £ invested.

Thus such a high rank could be misleading to investors and really dilutes the value / worth of the stock rank system IMO.

Caper4

Agreed. The queues at our local Sainsbury’s are ridiculous and I would much rather shop at Waitrose because of this . No way would I be interested in investing in any UK supermarket because of the low margins and lack of any significant brand loyalty.

sady

3rd Apr

The comparison between USA and UK markets boils down to cost of production.Everything is more expensive in UK as compared to USA, hence a better profit Margin.Try baking a similar cake from Costco at home and you will figure out the difference.Hope this helps.

ShoeShineBoy

Thanks for the article Roland, enjoyable read.

I bought Tesco (LON:TSCO) back in 2021 and it's done well for me. Especially when interest rates were 0.1%. It was a safe place to park some cash and get a decent yield. I've also made a reasonable capital gain which I really wasn't expecting when I made the investment.

I hear what other posters are saying with regards to operating margin and ROCE. Tesco (LON:TSCO) is the other end of the spectrum to something like Bioventix (LON:BVXP). But mgt at Tesco (LON:TSCO) have been sensible in their use of the balance sheet (they moved a lot of warehouse goods by train instead of road to save cash during covid) and exited businesses which were not regarded as core (eg: Tesco Bank). Plus the Booker business was a good addition a few years back, it has performed well.

My only gripe is the lack of a special dividend when the deal to offload Tesco Bank was done. I was hoping for that but never mind.

I do now think of selling Tesco (LON:TSCO) in order to buy Telecom Plus (LON:TEP) for a higher yield but as always, hoping for a more favourable buy price!

SSB

Does J Sainsbury deserve to be a Super Stock?

Summary

Profile

Business & Model

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About the Author

Roland Head

12 comments

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