Sainsbury’s has been the best performer of the big four supermarkets since the financial crisis, but recently, it's market share suffered the worst drop in a decade (16.9pc to 16.5pc) in the 12 weeks to March 30 2014. The company posted the slowest growth in a decade (5.3%) and same-store sales fell for the first time after 36 quarters of uninterrupted growth. This is mainly due to the intense competition in the UK retail sector, big rivals like Tesco and Asda on one side, and smaller discount stores like Aldi and Lidl on the other. Also, their long time CEO, who successfully guided the company throughout the last decade, is going out in July. But, they pay a nice 5% dividend.
SBRY is selling for 6.2 billion (3.26 GBP per share), with a P/E of 8.7 and Price to Sales ratio of 0.25. The company looks undervalued using a DCF and the following assumptions:
- after-tax profit of 716 million GBP
- 0% growth for the next 10 years and 0% thereafter
- discount rates of 6%, 8% and 10%
Although the price has already declined almost 25%, I am initiating a small short position because of slowing growth and intense price competition in the industry.