Is Now the Time to Buy Sainsbury's?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at J Sainsbury  (LSE: SBRY  ) (NASDAQOTH: JSAIY  ) to determine whether you should consider buying the shares at 328 pence.

I'm assessing each company on several ratios:

  • Price/Earnings (P/E): Does the share look good value when compared against its competitors?
  • Price/Earnings-to-Growth (PEG): Does the share look good value factoring in predicted growth?
  • Yield: Does the share provide a solid income for investors?
  • Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Stock Price 3-Year EPS growth Projected P/E PEG Yield 3-Year Dividend Growth Dividend Cover
J Sainsbury 328 pence 18% 11 1.8 5%% 13% 1.7

The consensus analyst estimate for next year's earnings per share is 29.6 pence (6% growth) and dividend per share is 16.7 pence (4% growth).

Trading on a projected P/E of 11, Sainsbury's appears to be more expensive than its major London-listed competitors, Tesco and Wm Morrison Supermarkets, which trade on P/Es of around 10 and 9, respectively.

Sainsbury's relatively high P/E and higher-than-sector-average growth rate give a PEG ratio of around 1.8, which implies the share price is expensive for the near-term earnings growth the firm is expected to produce.

Currently, Sainsbury's shares support a 5% yield, which is slightly above that of its competitors' average of 4.1%. Furthermore, Sainsbury's has a three-year compounded dividend growth rate of 13%, implying that the payout can continue to outperform that of its peers.

Indeed, the dividend is nearly two times covered, giving Sainsbury's plenty room for further payout growth.

Does Sainsbury's deserve a premium over its competitors?
Sainsbury's recently reported that its sales over the last quarter increased by around 3%, which I understand marks the 32nd quarter of consecutive growth for the company. In addition, Sainsbury's registered a 15% rise in sales from convenience stores and a further 17% rise in online sales during the same period.

However, despite this impressive growth, I believe Sainsbury's is currently overvalued compared with its peers. You see, Sainsbury's recently announced that it expects its growth to slow during the next couple of months as customers "rebalance" their budgets after Christmas. Furthermore, competition from both Tesco and Morrison is intensifying as household finances become even tighter.

That said, I can see Sainsbury's was the only major supermarket to gain market share during the Christmas period.

Unfortunately, Sainsbury's does lack the international diversification of some of its competitors, and I believe this could hold back growth. Nonetheless, Sainsbury's is still expanding in the U.K., with the company targeting an extra million square feet of retail space by 2014.

Lastly, I believe Sainsbury's does deserve a premium over its competitors following its sector outperformance of the past few years. However, with the company's growth predicted to slow in the near term, I think the company's current premium over its major competitors could be too high.

So overall, I believe now does not look to be a good time to buy Sainsbury's at 328 pence.

More FTSE opportunities
Although I feel now may not be the time to buy Sainsbury's, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held by Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to last October.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.


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