The J Sainsbury (LSE: SBRY) share price is firmly in negative territory today. That’s despite the FTSE 100 constituent reporting that it had gained market share over the last six months and was in a solid position as the festive season approaches.

With the stock having come back down to earth following a flurry of takeover talk, is now a perfect time for me to buy?

Higher sales

Grocery sales rose 0.8% in the 28 weeks to 18 September compared to the same period last year. Perhaps more tellingly, sales were 9.1% higher relative to two years ago when few of us had ever uttered the word ‘coronavirus’. 

Sainsbury also said that it had made ground on competitors as a result of offering better value, new products and improved customer service. It had also seen “significantly lower” costs over the period. 

It wasn’t all rosy. Sales of General Merchandise fell by 5.8% compared to last year. That’s not necessarily surprising given the huge boost the company experienced as a result of multiple UK lockdowns in 2020. Again, the comparison with sales two years ago is probably a better gauge of performance. On this measure, sales were up 1.1%.  

So, why is the Sainsbury share price down? 

Looking ahead, CEO Simon Roberts warned that supermarkets face “labour and supply chain challenges“. Notwithstanding this, he went on to say that the company’s scale, operations and relationships with suppliers should allow it deliver “the best possible Christmas” for its shoppers. The market, it would seem, is less optimistic.

Investors may also have been spooked on expectations that customer behaviour will continue to “normalise” and growth in grocery sales “moderate“. This is hardly revelatory. Nonetheless, it arguably implies that SBRY is not the investment opportunity it once was. 

Despite this, no changes were made to guidance. Having hit £371m over the first six months, underlying pre-tax profit is still expected to be at least £660m for the full year. 

Takeover talk

Sainsbury stock was priced at 13 times earnings before the market opened. Valuation-wise, this puts it on par with rival Tesco. In terms of recent share price performance, however, there’s no contest. The Sainsbury share price is up almost 34% over the last year. Tesco has gained just 2%. 

Does this make SBRY a screaming buy? I’m not so sure. Sainsbury’s superior gains can probably be attributed to rumours that it’s now a bid target following the acquisition of Morrisons by private equity. 

Clearly, the share price could soar again if these rumours resurface. That said, I would never buy a stock solely on this possibility. As a long-term Fool, it’s the underlying business that matters to me. And with suggestions that Christmas sales at (Sainsbury-owned) Argos are likely to be held back by limited product availability, I can’t see the next few months being easy.

It seems I’m not alone. The stock continues to attract significant interest from shorters.

Better buy

I’ve long considered Sainsbury to be a value trap. Recent performance flies in the face of this. In an industry where clout matters, however, I still think the best option is Tesco. It has almost double SBRY’s market share, offers a similar dividend yield, has lower debt relative to its size and slightly better margins.

This all gives it an edge when it comes to selecting FTSE 100 stocks for my own portfolio.

The post The J Sainsbury share price falls despite rising sales. Should I buy now? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Tesco share price interest

As I referenced in a previous article, competitor Morrisons has accepted a £7bn bid from US private equity firm CD&R. The bidding war for Morrisons led to its share price soaring over 60%. This interest seems to have rubbed off on the wider supermarket industry, with Sainsbury’s and Tesco also seeing their shares jump 5% and 10% in the last month, respectively. Any takeover speculation is likely to benefit Tesco shares, even if an acquisition never comes to fruition. 

Not that the share price has been on an uninterrupted upward trajectory. The Tesco share price fell sharply in February, but it wasn’t anything to worry about. In early 2021, it announced a special 50.93p dividend would be paid to investors. This was made possible by the £5bn sale of its Asian businesses. The shares fell almost 30% in the process as it performed a share consolidation. This meant 15 new shares were issued for every 19 existing ones — and investors became £5bn richer in the process. 

Tesco currently boasts a healthy 3.91% dividend, significantly higher than the FTSE 100 average of 3.3%. This would make Tesco a great income addition to my portfolio, I feel, and is another reason I like the stock. 

Brexit problems

There are risks, however. Brexit food shortages have been exacerbated by the pandemic. This has sparked fears of increasing future food prices. In July, the British Retail Consortium (BRC) shop price index showed that average food prices had declined 0.8% year-on-year. However, BRC Chief Executive Helen Dickinson added that “rising commodity prices and Brexit red tape” were creating an unsustainable price environment for the UK supermarket sector. Moving forward, this could be a problem for Tesco shares.

In addition to price problems, the HGV driver shortage is putting increased strain on the sector. Analysts have estimated a shortfall of 90,000 drivers could lead to food shortages during Christmas and into 2022. This will inflate prices further and could also damage the Tesco share price.

A cheap buy?

Tesco shares are currently trading at a P/E ratio of 19x, significantly above the FTSE 100 average of 15.8x. However, I expect this number to drop if Tesco is able to meet its earnings targets for the quarter. It reported a 13% increase in like-for-like sales in Q1, which should help drive up earnings. 

Aside from this, the UK supermarket sector is a good defensive play, I feel. People will always need food. Although Brexit is already causing problems, I don’t believe these will be too heavily reflected in share prices. Overall, although don’t think Tesco shares will make any crazy gains in the near future, I like Tesco as a solid income option for my portfolio.

The post Should I buy Tesco shares today? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

Dylan Hood has no position in any shares mentioned above. The Motley Fool UK has recommended Morrisons and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As a value investor, this performance has attracted my attention. I’m always looking for cheap shares that can diversify my portfolio, and it seems as if Tesco might qualify.

However, Tesco’s stock price doesn’t tell me much about its underlying performance. Just because it is trading lower today than 12 months ago, doesn’t mean the stock is worth buying. So I need to dig deeper.

Looking at Tesco’s financials

The first step I take in understanding if Tesco is undervalued is checking its financials.

Tesco recently released its preliminary results for 2020. Headline sales excluding fuel were up 7.1% to £53.4bn, driven by an 8.8% rise in its core UK and Ireland stores. However, Tesco Bank revenue fell by £400m, or 31.2%, during the pandemic. Adjusted operating profit also dropped to £1.8bn from £2.5bn in 2019-20, down 28.1%. This was largely due to £900m of extra costs relating to Covid-19. 

However, it was not all doom and gloom. Covid-19 has been dreadfully difficult for almost every industry, grocery included. Tesco has implemented massive infrastructural and behavioural changes to combat the pandemic. But the supermarket reckons only a quarter of these extra costs should continue into 2021-22. If this is the case, then Tesco has predicted that its bottom line could see a boost of £675m from lower expenses.

To me, 2020 was a Covid-induced blip.

Tesco’s share price potential

Despite the rise of discount competition, Tesco is still dominant in the UK grocery market with 27% market share. Although it operates in a mature market, meaning that growth will be slower, I’m not worried. Its market dominance and 9.15p per share dividend payment make it an optimal retirement stock for me.

And it does still have growth opportunities. Tesco is focusing on growth by opening new Express format stores. These are smaller shops that typically have less choice than their larger counterparts. I think this enables Tesco to boost its brand and distribution network at lower cost. As well, Tesco has entered the growing plant-based meat industry, a sector that analysts expect to be worth $17bn globally by 2024.

Continued innovation and market opportunities such as this will only help to see Tesco’s share price grow. 

Risks to Tesco’s share price

As a British grocery chain at the top, it can be very easy to fall. Stiff competition from the likes of Sainsbury’s and Morrisons pose a significant threat. The German players are also making strides in the British market, with Lidl and Aldi both gaining market share in 2020. 

And Covid-19 is still a problem. Tesco’s profits could suffer if more infectious variants of Covid-19 emerge, as we’ve seen in Brazil, and postpone the global reopening. Conversely, Tesco’s sales may take a short-term hit if pubs, bars, and restaurants boom after reopening.

So, is it too cheap?

I believe that Tesco represents a great discount buying opportunity right now. This is a dividend-paying market leader that has managed a global pandemic pretty well from my perspective. Any dip in its price is short-term in my opinion, so I’d be happy to buy it at these prices.

The post Is the Tesco share price too cheap at current levels? appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

Jamie Adams has no position in Tesco. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.