Pick up a bargain investment at Sainsbury's

J Sainsbury is cheap and could soon be the subject of a private-equity bid. Matthew Partridge explains how to play it.

Sainsbury's supermarket
J Sainsbury, Britain’s second-biggest supermarket, has a 15.2% market share
(Image credit: © Chris J Ratcliffe/Getty Images)

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.

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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.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri