One of the key trends over the past year has been the sharp increase in private-equity firms bidding for listed British companies in order to take advantage of the relatively cheap valuations in London’s stockmarket. One sector that has seen a frenzy of activity has been supermarkets.
Wm Morrison shareholders were recently bought out by private-equity firm Clayton Dubilier & Rice (CD&R) following a bidding war with private-equity rival Fortress. The fight proved highly lucrative for Wm Morrison’s shareholders. The final acquisition price represented a 61% premium to the stock’s level before the first bid was announced in June.
However, while the battle between Fortress and CD&R for control of Wm Morrison may be over, the speculation about which supermarket could be next has only just begun, especially since Fortress has said that it is still interested in British assets.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
One supermarket that looks particularly attractive is J Sainsbury (LSE: SBRY). In mid-2021 it was the second-largest supermarket in the UK with a 15.2% market share, putting it ahead of both Asda and Wm Morrison. While Tesco, which controls just over a quarter of the market, is a potential alternative, Sainsbury’s has more chance of being the subject of a bidding war: its market capitalisation is only a third of Tesco’s, which makes it a much easier target for any potential buyer.
Solid sales growth
Of course, there is no guarantee that any bid will materialise, and Sainsbury’s shares have fallen by around 15% from their August peak. However, even if nothing happens, Sainsbury’s still has a strong track record of delivering growth, with its sales rising by an annual 4%-5% over the past five years. While some of this was due to the pandemic, as people were forced to cook more food themselves, rather than go to restaurants, rising consumer confidence should keep sales growing. Sainsbury’s continues to make progress on cutting costs and further developing its online operations.
The group does face some challenges, however. It needs to find a way to offload its bank – or make it more profitable – while it also continues to grapple with ongoing shortages owing to disruptions in supply chains. However, these difficulties are more than offset by the supermarket’s relatively low valuation. It trades on a modest 2022 price/earnings (p/e) ratio of 13.7 and is also valued at 1.06 times the value of its net assets, or book value. Tesco is valued at 1.52 times book value, while WM Morrison was worth a whopping 1.65 times when it was sold.
Sainsbury’s share price seems to have stabilised following the decline in August and September, and it is now trading at slightly above its 50 and 200-day moving averages. So I recommend that you go long at the current share price of 294p, at £6.50 per 1p. With a stop-loss of 144p, this gives you a total downside of £975.
-
Will Labour scrap the British ISA?While it was the brainchild of the Conservatives, the British ISA received little love and now it seems Rachel Reeves may scrap the idea altogether. What does this mean for the ISA landscape?
-
Direct Line returns to profit but loses almost 500,000 customers - here is what it meansDirect Line posted a pre-tax profit of £61.6m for the six months to June 30, compared to losses of more than £75m a year ago - what does it mean for the insurance sector?
-
Is Alpha Group a good buy?Alpha Group helps clients manage risks such as foreign exchange. After being promoted to the London Stock Exchange, does the stock still rally?
-
Vistry sales improve – should you buy into the boom?Housebuilder Vistry’s unusual business model has fuelled rapid sales growth amid a sluggish private sales market
-
Ocado shares plunge after FTSE 100 demotionOcado remains unprofitable and overvalued. Is it time to let go of the online supermarket?
-
Should you invest in Axos Bank?Axos Financial is highly exposed to America’s commercial-property slump
-
Is PayPal a good stock to buy?PayPal's revenue growth has accelerated in double digits, but is the success short lived?
-
It's time to back the yen, says Dominic FrisbyThe Japanese yen has been weak for a long time, says Dominic Frisby. That may soon change.
-
What is FX trading?Tutorials What is FX trading and can you make money from it? Rupert Hargreaves explains how it works and the risks.
-
The Burberry share price looks like a good betTips The Burberry share price could be on the verge of a major upswing as the firm’s profits return to growth.
