Why you should stick with Sainsbury's

Despite a great track record, Sainsbury's has fallen out of favour with investors, underperforming the wider market by 25% in the last two years. But there are plenty of reasons why it's a good-value buy, says David Stevenson.

An updated version of this article was published on 9 November 2011: Why you should stay with solid Sainsbury's.

Where do you get your fresh fish? Try Sainsbury's (LSE: SBRY) your local store will soon be giving it away free!

That may look like a gimmick. But it's part of the chain's plan to encourage customers to make more sustainable choices. And it shows what supermarkets have to do nowadays to drum up extra turnover.

Food retailing is a classic 'consumer staple' business. In other words, regardless of what we may want to buy elsewhere, we still need to eat. In Austerity Britain, even this sector has been facing a "continued tough environment", says Sainsbury's boss Justin King.

But that hasn't stopped Sainsbury's growing. Excluding fuel, like-for-like revenue for the 12 weeks to 11 June rose by 1.9%, in what the firm called a "solid sales performance in line with our expectations".

OK, it was a touch below analysts' forecasts. But it was still better than Tesco's 1.6% annual revenue increase. What's more, it was Sainsbury's 26th successive quarter of same-store sales growth.

And while the rest of 2011 promises to remain "very competitive" as "customers continue to manage their spend carefully", says Mr King, he sounds confident that the firm can continue to meet the challenge.

So where does this leave Sainsbury's as an investment? Despite that great track record, this stock has fallen right out of favour. Over the last two years it has underperformed the overall market by 25%. And this has created an opportunity.

Net profits are expected to grow by 9% this year, according to City analysts. This would lower the current price/earnings (p/e) ratio to below 12. Meanwhile the yield looks good: historically it's 4.7%, and prospectively 4.9%.

That's appealing enough. But there's another reason for investors to like Sainsbury's the scope for making more money from existing sales. Right now the group's net profit margin is just 3%. That compares with Morrison's 3.84% and Tesco's 4.36%.

Sure, it's likely to take time. But if Sainsbury's can gradually lift its net profit margins just halfway towards the average of its rivals, earnings would get a near-15% boost. And that would make the shares even better value.

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