Merryn's Blog

Why you should stick with Sainsbury's

Yesterday's results from Britain's third-biggest supermarket chain were hardly stuffed with doom and gloom. So why did Sainsbury's shares drop – and what happens now?

Yesterday's results from Britain's third-biggest supermarket chain were hardly stuffed with doom and gloom. So why did Sainsbury's (LSE: SBRY) shares drop and what happens now?

"Sainsbury's continues to perform well second-quarter like-for-like 'ex-fuel' sales were up 5.4% - strong momentum has also continued with record levels of product availability and customer service", says Justin King, CEO of Britain's newly elected 'Supermarket of the Year', in the latest trading update.

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Sounds good enough to me. But the stock market took a dimmer view, marking the shares down 3%.

Now clearly yesterday wasn't the best day to make a statement the FTSE 100 fell 0.6% overall. But investors' real objection was to Mr King's warning that he expected "market growth to slow due to reduced inflation" in a "challenging consumer environment".

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We're not too surprised by that view. As you'll probably know, we're not confident about a UK economic pick-up next year. For every upbeat indicator emerging, a much less optimistic one appears. So we think another slowdown could be on the way.

But the key here, as we pointed out in Money Morning last week (Why you should buy shares in Sainsbury's), is that this has already been priced into supermarket shares particularly Sainsbury's. The latter has underperformed the FTSE 100 by 25% since the market low on 9 March. And sales and profits are, and will keep on, growing steadily.

09-10-08-bloggraph

The red line shows British 'input' prices for imported food, while the green line is the relative performance of the UK food retail sector. While there have been times they've moved together i.e. at the start of the decade when both fell that's by no means always been the case. Indeed, falling food prices have often flagged a rising relative performance by supermarkets.

So I'm sticking to my guns now still looks like a good time to snap up some Sainsbury's shares.

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