How J Sainsbury Measures Up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth at a Reasonable Price," or GARP, strategy. This theory uses the P/E-to-growth ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below one is generally considered decent value for money.

Today I am looking at J Sainsbury (LSE: SBRY  ) (NASDAQOTH: JSAIY  ) to see how it measures up.

What are J Sainsbury's earnings expected to do?

 

2014

2015

EPS growth

6%

6%

P/E ratio

12.1

11.4

PEG ratio

2.1

1.8

Source: Digital Look.

Sainsbury has punched solid single-digit earnings growth during each of the past five years, and the supermarket is expected to maintain this trend for the year ending March 2013 and in 2014. The company is currently changing hands on a PEG rating above one, while its price-to-earnings readings for the next two years are also running above the watermark of 10, although Sainsbury's values are not stratospherically high. Stocks that trade below 10 are generally viewed as exceptional value.

Does J Sainsbury provide decent value against its rivals?

 

FTSE 100

Food and Drug Retailers

Prospective P/E ratio

16.2

65.3

Prospective PEG ratio

3.9

8.5

Source: Digital Look.

Sainsbury compares favorably to the FTSE 100 in terms of both PEG and P/E ratios, and it also beats the comparable values of its peers in the food and drug retailing sector. Indeed, Tesco's 2013 PEG ratio of 24.9 reflects the heavy work the company has to carry out to counter last year's heavy earnings pressure, while a forecast earnings dip for Wm. Morrison this year means that a PEG ratio is not applicable.

Although Sainsbury cannot be considered a classic GARP stock due to its greater-than-one PEG reading, I believe the supermarket is a strong investment candidate for those seeking lucrative long-term growth.

Sainsbury's sales continue to outstrip rivals
Sainsbury has diligently nurtured its position in the U.K. grocery space over many years to grab market share from its major rivals, allowing it to consistently deliver earnings growth despite wider difficulties in the retail environment. The firm has moved up a place from last year to become Britain's joint-second-largest chain in terms of overall share.

And the latest data from researcher Nielsen shows Sainsbury's sales rise 5.3% in the three months to April 27. That's the largest rise out of the U.K.'s four largest chains: Asda sales rose 1.9% by comparison, while Tesco and Morrison lagged at 1.2% apiece.

Sainsbury has worked hard to improve both the quality of its products and the reputation of its brand, which -- allied with aggressive pricing schemes -- has allowed it to make huge strides in claiming the middle ground in the grocery space. The company is also reporting growth of about 20% per year across its online channel, while it is also ramping up its activities in the convenience store space. In my opinion, the firm is well positioned to continue enjoying plump growth.

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