Morningstar Cuts Sainsbury Valuation, Shares Undervalued

Weak sales and a lacklustre outlook have led Morningstar analysts to cut their fair value estimate for Sainsbury shares

Holly Cook 2 October, 2014 | 10:29AM
Facebook Twitter LinkedIn

Weak sales and a lacklustre outlook have led Morningstar analysts to cut their fair value estimate for Sainsbury (SBRY) shares. Following the supermarket group’s second-quarter earnings announcement on Wednesday, which revealed the firm continued to lose market share to discounters Aldi and Lidl, Morningstar’s Ken Perkins has lowered his valuation to 295p per Sainsbury share from 335 previously. “This is primarily due to lower near-term sales and a lower outlook for long-term margins amid intense price competition from traditional supermarket stores and discounters,” Perkins said.

Such intense competition supports Perkins’ view that neither Tesco (TSCO), Sainsbury nor Morrison (MRW) enjoy any form of economic moat, or sustainable competitive advantage. “We still believe that Sainsbury's shares are undervalued,” Perkins wrote in his recent analyst note, “but we’re concerned that competitors’ recent price cuts, which were made in response to competition from discounters Aldi and Lidl, has spurred a race to the bottom (on pricing) that is unlikely to end over the near term.”

Sainbury’s management is currently undertaking a strategic review of its business, with the new CEO Michael Coupe stating that “no stone is going to remain unturned” during the review, a comment that adds uncertainty to the mix, although Perkins still believes Sainsbury is a somewhat lower-risk business than Tesco and Morrisons. “Sainsbury has less demographic overlap with the discounters and does not operate large supercentres/hypermarkets, which are in secular decline as consumers migrate to the convenience and online channel,” Perkins pointed out.

Sainsbury shares currently trade with a 4-star Morningstar rating, implying the market is marginally undervaluing their worth. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Sainsbury (J) PLC293.60 GBX0.62Rating
Tesco PLC362.50 GBX0.58Rating

About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures