Interactive Investor

Why Sainsbury's shares just hit multi-year high

6th July 2021 09:07

Keith Bowman from interactive investor

Online sales are growing, price cuts are matching the discounters, and it's increased full-year profit forecasts. Buy, sell or hold?

First-quarter trading update to 26 June

  • Like-for-like sales up 1.6% (excluding fuel)
  • Total retail sales up 1.6% (excluding fuel), two-year growth of 10.3%
  • Grocery sales up 0.8%, two-year growth 11.3%
  • Groceries Online sales up 29%, two-year growth 142%

A takeover battle for Morrisons (LSE:MRW) now overshadows the food retailing sector. 

The possible read across for rivals such as Sainsbury's (LSE:SBRY) is evident. The grocer’s shares are up by almost 7% since 18 June and prior to any bid for Morrisons (as of the close 5 July). That compares to a gain of just 2% for the wider FTSE 100 index (as of the close 5 July). 

Strong defensive cashflows and a largely freehold property portfolio have caught the eye of private equity investors at Morrisons and follows the previous purchase of Asda from former US owner Walmart (NYSE:WMT).  

As for first-quarter trading at Sainsbury’s, the update is broadly pleasing, with the core outcome a £30 million uplift in expected current full-year underlying profit to at least £660 million. Online grocery sales have continued to grow, rising by 29% year-over-year, with total retail sales up 1.6% excluding fuel. 

In all, the core concern across the sector, that of intense competition from the discount retailers Aldi and Lidl, remains the same. CEO Simon Roberts’ revival plan now has the further distraction of industry M&A activity, while Amazon's (NASDAQ:AMZN) potential part in the sector’s future remains to be seen. 

On the upside, an estimated dividend yield of close to 4% is tough to ignore in the now firmly established ultra-low interest rate world, while M&A activity is now asking appropriate valuation questions for all players. In all, the threat from the discounters has been considered high for Sainsbury’s. But yesterday’s news of a further £50 million investment in price cuts and this latest positive trading update could inject optimism into a consensus market opinion currently standing at a ‘strong hold’.

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