J Sainsbury (LSE: SBRY) is our best supermarket investment right now, I reckon.
The days when they could all whack high margins on their products and play the premium retailer part are gone, and were firmly back to a Lidl-led era of lower prices (and thinner rewards for shareholders), and we just have to get used to it.
But there is some upmarket middle-ground left, and it has traditionally been Sainsburys turf and I can see it staying that way.
Earnings fall this year
We are looking at forecasts for a 16% fall in earnings per share (EPS) for the year to March 2015, but Sainsburys does have to take its fair share of the punishment targeting a more upmarket demographic does not make it immune to competition or avoid the need for more price competitiveness.
First-half results due on Wednesday 12 November should put some flesh on the bones of todays forecasts, and at the beginning of October we did hear that Sainsburys saw ex-fuel like-for-like retail sales slip 2.8% in the second quarter, and down 2.1% over the half.
The deflationary environment is certainly hitting, and Sainsburys response is to price-match on brands with Asda but that still leaves room for higher-margin brands not carried by Asda, and for non-branded products like fresh meat and vegetables.
And set against the squeeze, Sainsburys keeps on winning awards at the end of September it picked up five more at the Retail Industry Awards, and also added the In-store bakery of the year title at the Bakery Industry Awards to its collection.
Things like that count in the battle to attract the better-heeled shopper, and I think Sainsburys will be able to pull ahead of the sector over the next couple of years. We already have a smaller EPS fall on the cards for March 2016, of 7%. And forecast dividends are still high at more than 5% and covered around twice by earnings theres enough leeway there for a dividend cut while still remaining ahead of the competition.
To top it off, with the price having dropped 40% in the past 12 months to 241p, the shares are on forward P/E ratios of under 10 for the next two years, which I dont see as stretching even in these tough times.
But first things first, and hopefully nothing disappointing next Wednesday.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.