J Sainsbury (LON:SBRY) released a trading statement today, which @SandyMidd tweets as “Sainsburys trading statement positive despite market reaction. Sales up 2.7% and LFL up 0.2%. Will probably put Tesco in shade. Strong HOLD.”
The market reacted positively to the statement at the opening, but its shares are now down 1.76% on the opening to 362.4p at 10:03.
So. Sainsburys. What’s it worth?
To answer that question, I thought I’d use the CAPM. I’m going to be really lazy about it, too!
The simplest model to employ – and I actually think it’s quite realistic – is the Gordon Growth model:
p = d (1+g) / (h-g)
where p – is our estimate of value for the share price – what we are trying to calculate d – current dividend g – growth rate h – hurdle rate
and additionally: rf – riskfree-rate b – beta of the stock erp – equity risk premium
“d” is easy enough to calculate – I just take analyst figuresm whichis 17.65p
“g” growth rate. You can get any answer you want for p by tweaking this one. I’m going to use the riskfree rate, which Aswath Damodaran favours for long term projections. He recommends using a 10-year riskfree rate. I’m using 10-year gilts, which gives me a value for rf and g on 2.95%.
“h” hurdle rate. If you recall from the CAPM, h = rf + b * erp There’s a whole can of worms involved in coming up with betas and equity risk premiums. Luckily, Damodaran recently computed the erp for the US, and came up with a value of 4.96%. If I wanted to make work for myself I could try to work out what the ERP should be for the UK. In the past I noticed that the UK and US are fairly similar, so I’m going to be lazy and use 4.96%. Incidentally, the ERP is quite high by historical standards, which should be bullish for stocks. But I digress.
Digital Look shows the beta for SBRY as 0.76. That struck me as surprisingly low. MRW has a beta of 0.72, and TSCO is 0.94. Walmart has a beta of 0.29, which is amazingly low, and perhaps even more suspicious. If I wanted to be thorough, I could start with some industry unlevered beta. Domodaran shows unlevered beta for the…
