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.
-
Adidas, Nike or Jordans - could collectable trainers make you rich?The right pair of trainers can fetch six figures. Here's how you can start collecting vintage Adidas, Nike or Jordans now
-
Early bird ISA investors flock to global funds, India and the USThere’s been an increase in investors maxing out their ISA at the start of the new tax year. But where are they putting their cash and why does it make sense to be an early bird investor?
-
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.
-
Why you should short this satellite broadband companyTips With an ill-considered business plan, satellite broadband company AST SpaceMobile is doomed to failure, says Matthew Partridge. Here's how to short the stock.
-
It’s time to sell this stockTips Digital Realty’s data-storage business model is moribund, consumed by the rise of cloud computing. Here's how you could short the shares, says Matthew Partridge.
-
Netflix has plenty of life in it yet – here's how to trade the sharesTips Netflix still has plenty of scope for growth, says Matthew Partridge, and the shares are reasonably priced. Here's how to play the Netflix share price.
-
Trading: Dunelm will keep growing, here's how to play itTips Furniture retailer Dunelm surged during the pandemic, but its shares have since fallen back. But it is well placed to take more market share from rivals, says Matthew Partridge. Here, he explains how to play the Dunelm share price.
-
Ashtead – a building equipment rental firm on solid foundationsTips The prospects for Ashtead, the building-equipment rental firm, are auspicious. Matthew Partridge explains the best way to play the share price.
