Sainsbury’s has potential but the shares have got ahead of themselves. It’s only a hold
The grocer’s stock had already risen following our tip in March but takeover talk has really given it a push, says Robert Stephens
Sainsbury’s has been seen as a takeover target for as long as Questor can remember. However, bid talk has reached fever pitch in recent weeks. Investors appear to expect an approach from Apollo, the US private equity firm that lost the bidding war for Asda last year. Even without the takeover speculation, Sainsbury’s shares were already making strong progress following our tip in March. However, the bid rumours have thrust them to levels where they lack a sufficiently wide margin of safety to merit new investment.
The retailer trades at 18 times forecast profits, which we see as close to full value even if earnings per share are expected to grow by 8pc in each of the next two years. We remain upbeat about the company’s longterm growth potential, however. Its refreshed strategy has yet to fully play out, while its latest trading update reported further progress in areas such as online, cost reduction and restructuring the supply chain. Moreover, consumer confidence has returned to pre-pandemic levels. This may support margins among mid-tier retailers such as Sainsbury’s, while a strong outlook for the economy, which is expected to grow by 7pc this year, should improve the outlook for domestically focused businesses. Hold.
Update: Taylor Wimpey
The approaching end of the stamp duty holiday may prompt more house price volatility. House sales tumbled by 62pc in July following a dilution of the policy at the end of June. Lower demand could realistically produce slower growth in prices than the 7.6pc seen over the past year. Despite this, we continue to rate house builder Taylor Wimpey a buy. It has outperformed the FTSE 100 since our tip in October 2018, rising by 13.1pc against 1.2pc for the index.
However, the long-term dynamics of the housing market appear intact. A fundamental undersupply of new homes, coupled with continued low interest rates and a rapidly growing economy, means that demand for Taylor Wimpey’s properties is likely to remain high. Government support such as the Help to Buy and mortgage guarantee schemes should further aid the house builder’s prospects.
The company is in a strong position to capitalise on this upbeat outlook. A £500m capital raising in the depths of the pandemic allowed it to engage in a land buying offensive that should offer long-term growth opportunities. Its £907m net cash position suggests it has the means to overcome any worsening of the pandemic.
Taylor Wimpey’s forecast priceto-earnings ratio of 11 suggests it still offers a favourable risk/reward opportunity given its long-term prospects.
Questor says: buy
Ticker: TW
Share price at close: 181.2p