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.
-
Which investment trusts could benefit from lower interest rates?As vehicles for long-term investments, many investment trusts were hit when interest rates rose in 2022. With interest rates expected to fall by the end of the year, could now be the time to invest in one of these unloved sectors?
-
How to protect your personal and financial data from cyber attacksM&S and the Co-op are the latest retailers to suffer from cyber hacks but consumers also need to be vigilant
-
IonQ 'offers no quantum of solace'Opinion Quantum computing group IonQ is inefficient, overhyped and overpriced
-
How Corpay is cashing in on expensesFinancial technology company Corpay has found a profitable niche managing corporate payments
-
Drone company Red Cat Holdings sees shares tumbleRed Cat, the unprofitable and inefficient US drone manufacturer is set to slide
-
Why Sezzle's shares may be overvaluedSezzle, the US buy-now-pay-later provider, is resting on shaky foundations. Is it time to sell this stock?
-
MoneyWeek's trading tips - how did they fare in 2024?My tips have yielded a profit and the open positions are proving lucrative, too
-
Should you invest in Trainline?Ticket seller Trainline offers a useful service – and good prospects for investors
-
Harworth doubles profit as revenue soars – should you buy?Harworth, a specialist property developer, is well-aligned with government policies, with revenue expected to rise by over 50% this year, and a further 30% the year after.
-
Bitcoin miner Riot Platforms bleeds money – what happens now?Riot Platforms struggles to make a profit and looks absurdly overvalued. Are troubles brewing?
