Mindful Money’s weekly shares watch: Sainsbury’s, Wolseley & Compass

29th September 2014


Given the headwinds the UK’s supermarket sector is facing and the debacle presently engulfing Tesco, investors will be eager to hear how business at Sainsbury’s is holding up when it updates the market this week.

With its shares off by 37% over the past 12 months, Sainsbury’s like Tesco and Morrison, is feeling the pressure intensifying on the back of the growing popularity of the hard-discounters such as Lidl and Aldi.

Wednesday sees the group publishes its second quarter trading update and it is expected that its new chief executive, Mike Coupe, will announce a fall in like-for-like sales of around 3.5%, having fallen by 1.1% – excluding fuel – in the first quarter. Looking at the predicted sales numbers, Hargreaves Lansdown Stockbrokers equity analyst, Keith Bowman, says: “Ongoing market share gains by the discounters, growing consumer brand desire for Waitrose and the full might of US Wal-Mart ownership at Asda all appear likely to have contributed.”

Prior to the announcement, analyst consensus opinion points towards a ‘weak hold’ but for his part Sheridan Admans, investment research manager at The Share Centre has the retailer on his ‘buy’ list. He says: “With Tesco under pressure for various reasons and this week’s release of research by Kantar showing further market share losses to the discount retailers, many expect Sainsbury to also publish disappointing figures. Investors will be concerned about the potential of Sainsbury cutting its dividend and will also look to hear of the new managements approach in tackling the company and sector difficulties.”

Before the supermarket group unveils its latest numbers, Tuesday sees fellow FTSE 100 member and plumbing giant Wolseley, report its full year results on Tuesday. Ahead of the report, and with its shares flat over the past year, the market consensus points towards a ‘cautious buy’.

Bowman expects that the group’s core US business will have been the main primary driver of performance, which should hopefully offset weaker markets such as France. He says: “Operating profit is forecast to have grown year-over-year by approximately 4% to £752m, whilst management’s use for previously highlighted strong cash generation could also prove a feature. Hopes for a further special dividend payment persist, although surplus cash could also be used to fund additional bolt-on acquisitions.”

Stephen Williams, equity analyst at Brewin Dolphin notes that with gross margins remaining steady, and the careful control of costs a key part of the strategy, Wolseley should be geared into any recovery in worldwide building conditions. He says: “This should start to come through in the next 12 months. On our current estimates the shares are on a prospective P/E ratio of 15 to July 2015. Given that Wolseley derives over 70% of operating profits from the recovering US market, this continues to look attractive.”

Elsewhere contract caterer Compass, ahead of its final results in November, delivers its fourth quarter trading update on Tuesday. The past 12 months has seen its shares move 13% higher and the stock is currently circling ‘buy’ territory, a sentiment analysts at Deutsche back while Numis has the business down as a ‘hold’, as does Admans. Looking ahead to the update, he says: “Investors will focus on how trading is going in emerging markets and the US, both of which were strong in the first half. Other points of interest will be whether the sluggish trading in Europe and Japan has improved. News of any fresh contracts and any change to profit margins will also be worth noting, although there may be an impact from the strong pound.”


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