Sainsburys (LSE: SBRY) is in trouble: like-for-like sales, excluding VAT and fuel, declined by 2.8% in the three months to 27 September. Its stock is down more than 30% in 2014, and also dipped by more than 3% in early trade on Wednesday but should you bet on it right now?
There are several reasons why the food retailers shares are attractive in the 240p-300p range.
Its Bad Out There
Sainsburys stock reached a one-year high of about 414p in mid-November 2013, buta new 52-week low was registered on Wednesday as the shares hit 240p following a downbeat Q2 trading update.
Inevitably, the shares of Morrisons and Tesco have been hammeredas well, and are down 5% and 3%, respectively.
Abearish view on the sector is justified, and the shares of three of the major food retailers in the UK may well end up trading at much lower multiples than 5/7x adjusted operating cash flow. The downside could be 40% or so.
Negative sentiment towards the sector has led many pundits to prepare for a worst-case scenario, which is scary indeed. Still, I dont think that Sainsburys stock,at this price, would be such a bad bet if the shares were included in a diversified portfolio.
The food retailer has total assets of 16bn, some 60% of which are represented by property, plant and equipment, while long-term notes and other investments are worth 2bn. The amount of goodwill and intangibles on the balance sheet is negligible, which is a good thing.
As at 15 March 2014, Sainsburys estimated market value of properties, including our 50% share of properties held within property JVs, was 12bn, the food retailer stated when it reported 2014 results.
Now, assuming property, plant and equipment, as well other non-current assets, are worth zero (yes, nothing!), Sainsburys would still be worth 4.3bn the value of its current assets. Thats about 10% less than its current market value.
Its complete nonsense, however, to suggest that its long-term assets should be valued at liquidation value according to a worst-case scenario. And even if we assume a massive 70% discount to the book value of those assets, Sainsburys could be worth 7.3bn, which is more than the value of its equity plus its net debt.
In this scenario, Sainsburys stock would be worth 382p, for an implied 50% upside.
What Should You Do?
Clearly, its not an easy call.
So much uncertainty surrounds the largest food retailers in the UK that this may be time to invest in them, the bulls argue. They may well be right. Investors, however, should bear in mind that if a worst-case scenario plays out, Sainsburys, Morrisons and Tesco will continue to lose market share at a fast pace as it has occurred in recent weeks.
Then, the losses will be painful
So is the food retail sector too risky for you right now?
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares in Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.