J Sainsbury’s - SBRY (Buy)
With some extra time on my hands, I figured I’d do a quick write up on me analysing Sainsbury’s and why I think it’s an interesting short term purchase, with the potential to be a long term buy.
We’ll start off easy and have a quick look at the last three months of trading.
We have seen growing volatility with COVID-19, you can see higher trading volumes and massive variation in price. However, we are only -1.9% compared to a month ago. The short term issues are now managed and expected, we can see the daily volatility is starting to return to normal once again.
The big unknown is this Thursday. It’s full-year report time. The analysts will see if they are right and we’ll get an official update on what’s next. Given the impact on deliveries and the sudden cash outflows looking after employees, hiring in distressing times, and refitting parts of their stores, I’m expecting weaker results. However, this is a temporary situation, and one they will recover from.
I’m going to use my GI app for my fundamental analysis, what I’m looking for here is outperforming the market. I’m trying to pick companies which look stronger on paper than their peers, rather than looking at an individual company in absolute terms.
This is always my starting point. The three key parts of fundamental analysis against all other stocks.
Normally I like a strong quality stock, but Sainsbury is a bit lacking, it looks pretty average, and the momentum isn’t any more exciting either. The value is why we are all here though. I think Sainsbury’s has been aggressively undervalued even with less than impressive full-year results incoming.
I’m actually surprised just how poor Sainsburys is when it comes to quality. They aren’t that profitable, with expensive ground rent and high operating costs compared to peers, plus the tough competition is keeping them from rising margins (0.20% is the margin to be spot on, pretty weak.) They aren’t Waitrose so they can’t just raise the price because there were too many Lidl folk milling around.
They also have some nasty debt to equity ratio. Sainsbury’s keep on paying out their dividend (ergo the high capital allocation score) but they really aren’t in a great position to be doing that. Really taking a moment to reduce their debt would take a load off their shoulders. But, the dividend is one of the most attractive bits of Sainsbury’s. An easy way to top up the investment without it haven’t to risk explosive growth (payout ratio of 647.06% )
This is the real money maker stuff I was interested in.
I wanted to see just how cheap Sainsburys was, not just concerning the whole market (even with the COVID-19 sell off it’s still very cheap!) but in absolute terms (just this once.) We have a trailing P/E of x111 (Yahoo Finance key stats for you to indulge.)
We have a super cheap price to sales, price to earnings, and a balance sheet which doesn’t make sense given the market cap. On paper, this should be worth more. What is very interesting to me is the cash low being so cheap as well. Sainsbury’s for all its fault has some amazing cash flow into the business. The margins are tight and they have some quality issues, but they have the cash coming into the business to maximise and improve upon.
With the full-year reports a few days away this is pretty interesting to look at. The future earnings are predicted to be strong but not the future revenue. It’s all coming down to that margin and how to cut their heavier costs. Even the sell-side analysts are shifting their sentiment to have a stronger outlook for Sainsbury’s that most of the market.
That could be in part to it being so very cheap right now. It’s worth more than the paper says, which would mean in a buy out we could expect the price to prop up (if the UK ever allows Sainsbury’s to sell! )
I’m always keen to see just how much the sentiment is changing and what else is happening.
It seems a switch from hold to buy for one analyst but everyone has largely stayed the same. It’s interesting for a hold analyst to move to a buy recommendation days away from a full-year report.
Looking at the price right now and having drunk the analysis the way only a bored investor can. I’ going to take the plunge and pick up a few shares ahead of the full-year results. Worst case it’ll be one I’ll hold onto until it’s no longer a value buy.
It still looks like a merger target than a long term buy and give to the kids, but some short term fun for me no matter what.
Let me know what you think. Do I need to add more, what bits do you like or don’t like? I’ll have a think about what I want to write about next.
Hope you are all staying safe and keeping well.