JSNSF - J Sainsbury: Incremental Progress Not Sufficient For Buy

2024-01-23 08:00:00 ET

Summary

• Sainsbury’s revenue growth continues to be strong, owing to the benefits of inflation on its pricing. The company has also seen market share growth, owing to its differing strategy.
• Management has been purposefully slow with increasing prices, making the company the most competitive it has been on price in recent memory.
• Alongside this, its range of products, private-label products, and customer experience has improved.
• We were hesitant about this strategy but an improvement in volume implies it is paying off as margins have remained stable.
• Sainsbury’s performance is poor relative to its peers but is reflected adequately in its valuation. Although it is trading at an FCF yield of ~9%, we believe the stock is not sufficiently undervalued yet.

Investment thesis

Our current investment thesis is:

• Sainsbury does not show us sufficient attractiveness to warrant a buy rating. Management is improving the company well and is arguably executing at a superior level to its peers. Despite this, the benefits are not tangibly reflected in its financial performance. This will likely be felt in the coming years although it remains to be seen to what degree.
• At a FCF yield of ~9%, the company could be attractive for defensive investors looking for a reliable company. Sainsbury is the second largest player in the UK and is unlikely to lose its position. With exposure to the wider retail industry, it represents an inherent bet on the UK economy.

Company description

J Sainsbury plc (JSNSF)(JSAIY) operates in the retail and financial services industries. The company has three segments, including Retail-Food, Retail-General Merchandise and Clothing, and Financial Services. It offers various store formats, including supermarkets and convenience stores, and is also involved in online grocery and general merchandise operations....

For further details see: