Playing with the financials of Sainsburys (LSE: SBRY), the more I look at projections, the more I struggle to find a way to value the shares of the UKs second-largest food retailer. And, equally important, I find no answers with regard to where the stock may be headed. Is that right?
Forecasts and discounted cash flowmodels are not reliable here, in my view. Of course, todays announcements and interim results havent drawn my attention, either. The stock is down 5% today so what?
So, I looked at the performance of Sainsburys in the 90s, when for the first time the stock started to trade above 300p.
Sainsburys in 1990 vs Sainsburys in 2014
The shares of Sainsburys traded around their current level of 250p in the late 80s and in the early 90s, when they started to rise above 300p. Between 1981 and 1990, financial reports show that Sainsburys grew revenue and earnings per share at an average annual rate of 20% and 25%, respectively.
In 1990, when the stock traded in the 250p/300p range, Sainsburys reported 7bn of revenue, 470m of operating profit, 451m of pre-tax profit, earnings per share at 19.6p and dividend per share at 6.10p. In those years, its assets base was very different from today, of course. Its shares traded on a price to earnings multiple ranging between 12.7x and 15.3x, a P/E range thattends to signal expansion for retailers. The shares seemed properly priced back then.
Sainsburys stock now trades at a discount of up to about 35% to 1990 Sainsburys, based on trading multiples. Yes, growth is a massive problem. And you also must have noticed, if you are familiar with the financials of Sainsburys, that Sainsburys now needs more than 20bn of revenue to generate between 700m and 800m of operating profit and roughly half a billion pounds of net profit. Earnings per share and the dividend yield are higher, though. Youd buy 1990 Sainsburys , but youd never buy 2014 Sainsburys, would you?
Worth Your Money?
Since 1 October, when I said the food retailers shares were attractive in the 240p-300p range, its equity valuation has risen by more than 10%, although it has pulled back a bit in the last few days.
Sainsburys may be worth your money because value is hidden in its stock at 255p, where it currently trades. By the very nature of the food retail sector, and taking into account the typical cash conversion cycle of food retailers, liabilities are less important when it comes to valuing a company such as Sainsburys. In fact, its shares could well be worth between 300p and 400p based on the value of its assets. I hear you: Sainsburys is shrinking and its profits are plunging!
Weakness in profitwill persist for a few quarters, but I think that no-thrills supermarkets should be very careful with their expansion plans. Some of the big guys out there may decide to shrink quickly and join forces to fend off the threat. And Sainsburys is best positioned to fight back.
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Alessandro Pasetti 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.
