I think the shares ofSainsburys(LSE: SBRY) offer a rather attractive entry point right now. But will they rise to 350p by the end of the summer, or will they plunge to 200p as pressure on food retailers operating profits continues to build up in the UK?
Here are a few things you should know before assessing the possible value of the investment.
On Its Way Up?
Backin May 2014 I argued that Sainsburys, the third-largest food retailer in the UK, was not the most obvious restructuring play in the industry. At that time the stock traded at 339p and I predicted a 20% downside for investors, for an implied price target of 270p.
The shares plunged to a multi-year low of about 224p in early October, and now trade at 260p.
Time and again, I have said trading multiples mean very littlewhen it comes to assessing the equity value of food retailers, one of the reasons being that nobody really knows whether the biggest players in the industry have hit rock bottom, or more pain lies ahead in terms of assets write-downs and shrinking profitability.
So, where does value reside in Sainsburys?
I still believe other shares in the sector, as well as other sectors, offer more upside than Sainsburys in the next 12 to 24 months, but Sainsburys could benefit from corporate action and restructuring plans at its rivals. Recent trends have shown that.
As I pointed out in my coverage of Tesco(LSE: TSCO) back in December,Tescos latest profit warning accelerates the process according to which the largest supermarket chains in the UK must take bold action, which is fantastic news for ailing food retailers and their shareholders, in particular.
While I prefer Tesco, whose shares have risen more than 30% since mid-December, the shares of Sainsburys have surged only 14% in about a month. Could they deliver a 40% pre-tax return to shareholders?
Well, if its a bounce from the lows, surely plenty of value could be up for grabs in months ahead. Brokers disagree, and they have pencilled in an average price target of about 240p a share. The possible rise in the shares does not depend on Sainsburys own strategy and fundamentals, however.
The latest few weeks of trading suggest that Sainsburys will continue to deliver value to its shareholders if its chief rivals, Tesco and Morrisons, continue to implement radical changes. In this context,Sainsburys is cutting costs to preserve profitability, which should help its financials. And even assuming a massive discount to the book value of its assets, Sainsburys could be worth more than7bn, which is a 40% premium to its current equity value.
But if you think I’m wrong , or you’relooking for yield and growth rather than restructuring potential in your investment strategy, I urge you toconsider asome of the value candidatesin our latestFREE report, which is available for a verylimited amount of time!
One of our top picks, for instance, offersa forward yield than beats the market by about two percentage points a year!
Annual capital gains in the region of 10% are likely, too. And if youare looking for exceptional returns in 2015, I suggest you learn more about anotherbusinesses, whose shares have been under pressure in recent weeks, but trade in bargain territory right now.
To find out moreclick here— the reportis free and comes without further obligation!
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.