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Is Sainsbury’s (LON:SBRY) share price now too cheap to ignore?

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Over the past 12 months, the Sainsbury’s (LSE: SBRY) the stock price lost 10%. Compared to Tescoit’s a gain of 20%, it’s really not good. The comparison is similar over five years – Tesco up 22%, Sainsbury down 13%.

But in “a year of unprecedented changein the words of CEO Simon Roberts, the year 2021-22 has seen a recovery in earnings. Has the stock price just not caught up to the rally yet, and can I afford to ignore it now?

The inflation problems of 2022 will not help, reducing margins at the wrong time. In the conditions we face today, I would expect Sainsbury’s to come under more pressure from the cheap on the cheap.

If I had to invest in the sector now, I think I would choose either the market leader or the cheap competition. The latter is Aldi and Lidl, which I cannot buy. So that would leave my supermarket investing thoughts focused on Tesco.

What am I missing?

But the last results suggest that I might be missing an opportunity. Compared to 2019-20, just before Covid-19 took hold, grocery sales were up 7.6%. There is clearly a pandemic surge there, with home deliveries increasing. But it was also broadly stable compared to 2020-21.

So until at least the end of the year in March, Sainsbury’s saw no decline as restrictions eased. It’s still early, mind. I will be watching the first quarter results of this year closely, due in July.

Sainsbury’s recorded an underlying increase in pre-tax profit of 25% over the full year 2019-20, which I think is a key figure. The 104% gain over 2020/21 is less significant, given the high Covid costs that year.

Weakening prospects

This all sounds pretty good to me. But here’s a downside…the company expects a significant drop in earnings this year. The current outlook puts underlying pre-tax profit at between £630m and £690m. It would be something between 5.5% and 13.5% less than the year just ended.

Important external pressures and uncertaintiesis what Sainsbury’s attributes it to. Right now it looks like a combination of high inflation, tight margins and intense competition. The grocer is also going on an “Aldi price match” spree, which is surely squeezing margins.

All in all, I’m not too surprised that SBRY’s stock price fell in response to these announcements.

Is Sainsbury’s share price cheap?

Would I buy Sainsbury’s shares now? I still think the chain is trying to find its place in the industry. It’s shed its slightly premium positioning and, in many ways, is content to compete on price. And realistically, I think that was the only reasonable way to go.

But it remains to be seen how much market share Sainsbury’s can retain, and it could take a few more years to find out.

That said, analysts still seem confident about the dividend. They expect 5.4% this year, and about the same next year. This increases the appeal of the depressed share price for me.

Sainsbury’s is on my “buy” list of candidates for the rest of the year. But, right now, Tesco would be my choice of sector.