SIF Folio: Is Sainsbury's A Super Stock In The Making?

19th May '20 by Roland Head

11 comments 4049 reads

I recently heard a discussion on a radio phone-in show about the idea that windfall taxes should be levied on companies whose profits have been increased by the coronavirus pandemic.

Inevitably, supermarkets were put forward as one potential target. The argument was that record sales during the lockdown period would be likely to result in record profits. Against this backdrop, supermarkets are benefiting from the 12-month business rates holiday that’s been granted to all retail, leisure and hospitality firms.

Perhaps conveniently, all three of the big supermarkets have said that the extra costs incurred handling the pandemic will roughly match the savings on business rates. So bumper profits seem unlikely, although I still expect a robust performance.

The politics of this situation are not for me to discuss. My interest today is J Sainsbury (LON:SBRY), a business that’s significantly underperformed its two listed rivals over the last five years.

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Rather to my surprise, Sainsbury’s almost qualifies for my SIF stock screen at the moment. The only area where the orange-topped retailer falls short is with its earnings yield of 6.5%, which is below my 8% minimum.

This has prompted me to take a closer look, especially as the retailer’s StockRank of 85 suggests that the Stockopedia algorithms have a positive view of this stock. Indeed, these ratings indicate that the stock is no longer seen as a value trap, as it was in February.

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With a new chief executive due to start work on 1 June, is this finally the right time to buy Sainsbury’s shares?

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Sainsbury’s ValueRank of 73 suggests that the stock scores well on measures of value. At face value this is certainly true.

Asset value: At the time of writing, Sainsbury’s shares are trading at 187p - a discount of almost 50% to their book value of 350p per share. If we strip out intangibles and focus on tangible net asset value, the stock still looks cheap when compared to its NTAV of 305p per share.

However, this situation isn’t new. The retailer’s share price has tracked consistently below its net asset value for a number of years, as these two graphics illustrate:

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Harry Hindsight

19th May '20

As a newbie thanks for the insights into how to read the stockopedia information and the caution with the traffic light indicators (momentum showing green).

I feel prices are rising and quality falling generally which is probably the difficult supply conditions. Quality and brand is important and loyalty can be lost so they have to be careful.

I am looking at who can corner the home delivery market and Morrisons look positive but don't see their vans around my way (London). On my one pick up order half the products were not available or lower price substitutes so won't be using it personally for a while, but will check out each over time and see who ups their game.

The corner shop (a Nisa now supplied by Co-op) has been a god's send and the staff as much heroes as our more generally applauded services.

Melvyngd

I am glad to see that you have decided to pass on Sainsbury, I am still learning my way around the Stockopedia charts and with a Z value of 0.04 i am surprised you have spent time discussing this stock.

Simon Rowan

I remember shopping in Lidl maybe 20 years ago. One of the main attractions was its size and the fact that it was usually empty. The wine was always pretty decent when compared to other supermarket wine but it did take them a few years to start competing on a more serious footing with cheese and meat. Veg was always ok and they seem to have grasped the idea of local produce. Fortunately we are blessed with great farm shops in our area too. The thing that was really noticeable was the supermarket bill. Lidal was always at least a 30% cheaper shop. Their big advantage is no shareholders to answer to. The correlation of the advancement of Lidl and and Aldi market share to the decline in the big supermarket sp's is no coincidence. The large supermarkets have been guilty of serious sharp business practices in the past that have conned their customers and suppliers alike for years. Some mark ups were in thousands of percent on basic things like herbs. Their day of reckoning is now well and truly on them. Tough shit!

Roland Head

20th May '20

Hi Melvyngd,

Thanks for your comment. Everyone's approach is different, but I tend to see indicators such as the Z score as part of the bigger picture rather than as a direct reason for a decision.

In case you're not familiar, you can see a breakdown of the individual components which make up the Z score (and others) by clicking on the graphic. I often find it's informative to drill down into these scores to understand the numbers a little better.

In this case, we can see that J Sainsbury (LON:SBRY) fails two out of the four tests.

The first test compares working capital with total assets:

We can see that Sainsbury's fails because its ratio of Working Capital/Total assets is below the required minimum of 0.2375. In fact, the test result indicates that working capital is negative. In other words, current liabilities are greater than current assets.

For some businesses this would be a serious concern, but in this case I don't think it's a problem. It's quite normal for supermarkets to operate with negative working capital.

The reason for this is that customers pay for supermarket stock long before the supermarkets have to pay their suppliers. Effectively, customers provide free credit for the supermarkets. This month's sales can be used to pay last month's wholesale bills.

Scores such as the Z-score are useful, but I think they need to be seen in context. In this case, I don't think this particular test is relevant to this business. Without this, I think the Z-Score would be higher.

Regards,

Roland

Hi Garry,

Thanks for your comment. I think the traffic light indicators for momentum are generally very useful, but it is important to understand the wider context.

The key here is that the traffic lights are measuring relative strength. With the FTSE 100 down by c20% over the last year, any stock that has avoided this kind of fall is doing relatively well. But it's not necessarily doing absolutely well!

Regarding J Sainsbury (LON:SBRY), my impression is that the company wants to maintain a slightly more upmarket brand than Tesco (LON:TSCO) and Wm Morrison Supermarkets (LON:MRW), but is finding that customers don't want to pay anymore than they would at these other stores (or even Aldi and Lidl). Squaring this circle is proving difficult for the company, in my view.

Hi Simon,

I agree. In my local town the choice is Aldi, Lidl or Sainsbury. I normally get most stuff at Lidl and save quite a lot compared to an equivalent shop at Sainsbury.

Pandemic shopping conditions have persuaded our household to start doing Click & Collect at Sainsbury, but the extra cost is very noticeable and I can't wait to return to Lidl.

Cheers,

Anthony127

Bearing in mind I think that we are in the early phases of a bear market then Sainsbury's strikes me as one of the traditional havens in these circumstances. There also appears to be some strong value metrics e.g. a PBV of 0.52 and a PEG of 0.39.

I note from viewing the UK Short Tracker that Sainsbury's has also been the subject of shorting activity. I noted a figure of 6.5% short interest yesterday which had reduced to 6.1% by close of play. If the share price holds up reasonably well then there could be a bounce as these shares are bought back.

I think a certain amount depends on the dividend decision; certain firms seem to be abandoning the dividend on a just in case basis. I think if the dividend is maintained that would be a strong signal.

steve gray

Agree with that. Sainsbury are outgunned by Tesco and Morrisons in the mainstream, less attractive than Waitrose at the high end and squeezed by the discounters at the low end. They are weak online relative to Tesco and Ocado. Argos is vulnerable to Amazon and other online specialists. Not sure where the new CEO will try and take the business but can't see it generating strong returns.

neill hamilton

21st May '20

Good analysis of stockopedia rankings. As you say, Sbry needs new CEO to get a grip on the business and at a minumum keep the dividend , though I thought I'd read it was already a goner

Interesting that the US big box retailers like walmart , target etc are all doing much better than UK equivalents, absolutely as well as relatively, share price wise. Guess it's a matter of scale due to size of home market

Thanks for the information I will investigate further, but I think the confusion gap is increasing.

Best wishes

melvyn

CRK

23rd May '20

Many years ago I worked for J Sainsbury although the store standards of operation are good. The own-label has gone down in quality. The buying method I am convinced has gone in reverse since the Sainsbury family is no longer in control. An example of buying own-label product specifications have gone down and margins have been increased.

SIF Folio: Is Sainsbury's a Super Stock in the making?

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Roland Head

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