Things are getting worse and worse in the supermarket sector.Last week,Sainsbury's (LSE: SBRY)told investors that its sales had fallen again during the last three months. Competition remains fierce, while bumper harvests mean that food prices are falling.
An increasing number of City analysts are now predicting that Sainsbury's will follow Tesco and cut its dividend.
Some are even more gloomy, saying that the value of its supermarkets will be written down and that it could even ask shareholders for more money. Given this backdrop, it's not surprising that Sainsbury's shares are down by more than a third this year.
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So, can Sainsbury's shares go much lower? Of course theycan especially if it has to resort to a rights issue. But I'm notconvinced that Sainsbury's finances are that bad. Its profitscould halve and it will still be able to pay its rents and debtinterest.
I've been too bullish on Sainsbury's shares, butSainsbury's still looks like the pick of this hated sector. It hasa very strong convenience store and online business and itsBasics' range is the cheapest in the UK.
You don't need to own supermarket shares, but one day the tidewill turn. When it does, Sainsbury's may be a share to own.
Verdict: one for the watch list
Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.
After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.
In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for Moneyweek in 2010.
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