Broker snap: Sainsbury still doing better than Tesco

13th Jun 2012 13:48

Sainsbury is in the doldrums after its first quarter update disappointed slightly, but Panmure Gordon argues the supermarket giant put in a decent shift, considering the miserable weather in April.Like-for-like sales (excluding fuel) rose by 1.4% year-on-year, which was below the range of expectations, which ran from +1.5% to +2.2%."The truth is that Sainsbury is still doing better than Tesco, even after stripping out the Jubilee, extensions (which contributed 0.8%), non-food and anything else that you want to adjust for. Tesco is narrowing the gap, but it still has a lot to do and Sainsbury could continue to outperform," Panmure Gordon reckons.Justifying its positive stance on the stock, Panmure Gordon said it sees Sainsbury generating sales growth of around 5% a year over the long term, with margin growth of between 10 to 15 basis points - there being 100 basis points to a full percentage point. This should lead to something close to high single-digit percentage profit growth, in the broker's view.The shares have come under some pressure of late due to slightly cautious guidance at the time of the release of its full year results. Sainsbury said that it expected this year's operating profits would grow in line with sales and that dividends in future would rise in line with earnings, to maintain dividend cover."On the latter point, two things. First, we find a yield of 5.8% relatively attractive. Second, we expect the dividend to grow. Trading on the lowest EV [enterprise value]/sales among the majors (0.33x versus 0.52x for Morrison and 0.47x for Tesco), we think that the shares have upside," Panmure Gordon's Philip Doggan argues.Panmure Gordon has a target price of 350p for Sainsbury. JH