J Sainsbury: Share Price Analysis Report – ACF 100

Executive summary

This report has the purpose of describing J Sainsbury through the changes in the firm’s share prices and possible reasons for the changes. The study period was 01 February 2018 – 31 January 2019. The line graphs constructed were indexed at the average of the previous month, therefore the comparison between the FTSE 100 and J Sainsburys was more evident and clearly stated, as the share price for the FTSE 100 was at minimum 6584.68p on 27^th December 2018, and the maximum share price for J Sainsbury was 341.50p on 22^nd August. This may have looked inaccurate and incomparable.

Through the study period, we compared our allocated company, J Sainsbury, to two rival competitors, WM Morrison and Tesco PLC. These two particular competitors were chosen because all firms provide the most similar goods, also Tesco is the leading supermarket with regards to market share. All firms have had different risks and opportunities posed on them through the study period, this report will outline and analyse how situations affected our firms.

Introduction

J Sainsbury is the second largest supermarket in the UK and was Founded in 1869, by John James Sainsbury. During 2018, due to the continuing developing process in Brexit, there were hardships in the economy that affected the share prices of Sainsbury’s and its competitors. This increased the systematic risk in the share market for investors and saw share prices more volatile in 2018 than 2017 from comparing the FTSE 100 index. However, there were also unsystematic risks faced by Sainsbury during the period, such as their merger with ASDA. This caused the fluctuation in the share price of Sainsbury to be more volatile than the FTSE 100 index at the same point of time. A more detailed analysis of the share prices of J Sainsbury PLC, Tesco PLC and WM Morrison PLC is written to compare the similarities and differences in their share prices, and with a further discussion about the reasons behind those changes later in this report.

Company analysis

J Sainsbury

Company profile and share price movements

J Sainsbury is the 2^nd largest supermarket chain in the UK, operating with 1400+ stores and 800+ Argos stores (Sainsbury’s, 2019). J Sainsbury also has a market capitalisation of £5309.6m, and in December 2018, had a market share of 16%, second to the leading supermarket chain Tesco at 27.6% market share (Statista, 2018).

As the FTSE 100 and J Sainsbury index comparison above shows, the share price movements were very similar, both showing a sudden peak around May 1^st. The FTSE 100 had reached a share price of 7520.36p on this date and J Sainsbury reached a share price of 314.500p. This peak was due to the significant news about the merge of J Sainsbury and ASDA. The FTSE 100 had many fluctuations throughout the study period, it had the highest share price in 3 years on the 22^nd May 2018 at 7877.45p, ‘rally of more than 14 per cent from its March low’ (Hunter, 2018). Hunter (2018) also claims that the reason for this is because many of the FTSE 100 companies are multinational and so with a weaker pound comes benefits to earning revenues abroad. This peak occurred when the pound was at its lowest point of the year.

The highest share price during 2018 was 341.500p on the 22^nd of August, and the lowest share price was around 225.500p on March 26^th. (Londonstockexchange.com, 2018). Immediately after this slump in share prices, there was a steady increase until a peak on May 1^st, the initial increase could have been due to positive recognition on J Sainsbury’s low mortgage rates (Warwick-Ching, 2018). In addition, Elder (2018) claimed that the big 4 supermarkets in the UK (Tesco, J Sainsbury, Asda and WM Morrison) have postulated in ‘delivering margin growth’. Which will have brought confidence to investors on the firm’s increasing share prices; as positive margins relate to increasing share value.

The lowest price of the year occurred on 26^th March 2018 at 225.500p, which was also one of the lowest points for the FTSE 100 at 6888.6900p, and it was following a sustained decrease in the share price beginning on 28th February. Then, the share price experienced recovery and soar from April 2018 to May 2018. Eley (2018) claims that J Sainsbury reduced the prices of general goods and therefore saw a rise in sales, yet still wasn’t at par with the 3 other big 4 supermarkets in the UK. As sales growth was apparent, shareholders saw an increase in the value of shares. From April 2018 to June 2018 share value increased from 238.200p to 321.200p, an overall increase of 34.84%.

Eley (2019) claims that December was a struggle for all supermarkets due to the ‘global financial crisis’ where the share price dropped from 315p to 265p.

Morrison WM

Company profile and share price movements

Morrison (WM) Supermarkets PLC is a large UK registered supermarket, operating with 491 stores and a market capitalisation of £5447.05m, which is significantly close to J Sainsbury’s market cap. The financial year from 4^th February 2017 to 4^th February 2018 brought total revenues of £17.3bn, up 5.8% from the previous year, but as we can see from the share price movements, on the 14^th March 2018, the final financial results for Morrison WM brought a 6.82% decrease to share prices. Elder (2018) argues that ‘margin erosion overshadowed full-year results’ therefore illustrating why there was a decrease in share price movements. Morrison WM was under a sustained decline of 9.72% from the 13^th March 2018 to the 26^th March, at which was the slump of the study period, at a share price of 204.300p. (Londonstockexchange.com, 2018).

Morrison WM is a member of the London Stock Exchange’s FTSE100, like J Sainsbury, and thus can be argued that with the same exchange market size of 7500, they are fundamentally close competitors, both offering food and drug retailers around the UK. Morrison (WM) and J Sainsbury both in the year of 2018 had earnings per share of 13.30p, but arguably because Morrison (WM) has a lower net asset of £4545,000 compared to J Sainsbury’s £7411,000, Morrison (WM) could be seen as more efficient with allocating capital to produce income. (Londonstockexchange.com, 2018).

Morrison (WM) saw a directorate change on the 18^th January 2019, which increased share prices by 4.31%. Both Morrison (WM) and J Sainsbury have similar timing for troughs and peaks with share prices. This could be due to them being in the same industry, which means any externality that affects one firm, will most likely affect the other. The systematic risk of Brexit has caused inflation and a peer-reviewed report, Anonymous (2018), claims that if the domestic country’s currency is weak, inflation rises. This will lead to increased import prices and this illustrates externalities affecting both businesses because of the market they operate in.

Tesco

Company profile and share price movements

Another main competitor of J Sainsbury is the British multinational supermarket Tesco PLC, which is one of the members of FTSE 100, and according to Thomson Reuters (2011), is the third largest retailer in the world following Carrefour and Walmart. Tesco has a market capitalisation of £23,171.41m, much larger than both J Sainsbury and WM Morrison (Londonstockexchange.com, 2019).

However, like every UK-Based multinational company, Brexit has affected this retailer in many aspects, especially their stock prices in the FTSE 100, according to the London Stock Market, Tesco’s share prices faced a descending trend from the beginning of October 2018 to 1^st January 2019 and dropped by approximately 46.600p. On the 1^st October 2018, Tesco agreed to a settlement of £16.4m due from a fraud incident in 2016, this caused a 7.55% decrease (Londonstockexchange.com, 2018). Also, according to Butler (2018), on the 3rd of October 2018, Tesco’s shares dropped more than 9% due to problems caused in overseas branches, this fall in share price was the worst fall since the Brexit referendum, and now with the possibility of a no-deal Brexit this multinational company should come up with the best alternative to avoid a big fall in share price.

The main sources of the 9% fall of stock prices were the branches based in Thailand and Poland, in Thailand, the rate of sales dropped by 5% and the Poland branches saw a loss of £32 million pounds which resulted in closure of 18 out of 429 stores within the country (Eley, 2018). Tesco’s share prices have been dropping ever since their H1 announcement on the 3rd of October and reached its lowest point on December 27^th at 189.550p. However, according to a report by Opto (2018), Tesco’s merger deal with Booker (Wholesale operator in the UK) and Carrefour (French Multinational groceries and goods retailer) in July was a huge factor for Tesco’s success in resolving the crisis and restoration of stock prices in 2019.

Event analysis:

J Sainsbury

During the end of April, a publication was released about the ‘proposed combination of J Sainsbury plc and Asda Group Limited’ (Londonstockexchange.com, 2018). This report was released on 30^th of April and immediately the share price for J Sainsbury increased by 14.48%, from 269.800p to 309.000p. These two firms are the second and third largest retail grocers in the UK, and therefore merging will increase market power for the two corporations. Therefore, investors in this market will value their share at a higher value than before because they have more confidence about the management and marketing. However, it is inevitable that the management in the two firms will know the news about the merger prior to the formal announcement, and they will try to grasp the profit through buying the shares in the market at a lower price and selling them at a higher price even though they are at risk. Besides, the merge might threat the leading grocer of Tesco in this industry and existing shareholders in Tesco might try to switch investment from Tesco to J Sainsbury, to better their return.

WM Morrison and Tesco reaction to the publication of the merge

As the share price graphs show on page 9, WM Morrison and Tesco did not have a negative stock reaction to the news about the merger on the date 30^th April. Eley (2018) claims that the merger may not go forward as authorities will be analysing the merge in-depth and ensuring regulations are abided by, therefore shareholders in WM Morrison and Tesco may believe the merger will not occur and so their share is benefitting more in their original firm. Assuming that it is an established yet slow-progressing market, with the data from Statista, the reason that share prices for WM Morrison and Tesco increased by 3.6% and 3.5% respectively is because of the news about the merger may have brought attention to this industry and thus increased the demographic of shareholders. In addition, the FTSE 100 share price increased by 0.147%, due from the sheer size of the 3 firms spoken about, they will instinctively affect the FTSE 100 because of their size, when share prices increase or decrease.

Conclusion:

Based on the information collected, J Sainsburys’ performs well through the study period allotted. The share price of Sainsbury’s surpassed that of its competitors after the announcement of the merge and it maintained a share price above 300p during the late half of the year. Before the announcement, the share price of competitor supermarkets just performed their usual, they both underwent slight fluctuations within five to ten per cent. However, they recovered very quick, it may have been seen as not only a threat but also an opportunity, that through marketing and strategic management they can benefit. The merge may also protect stable supermarkets from other new entrants or newer firms like Aldi and Amazon by maintaining customer loyalty, while also lowering costs. The share price of J Sainsbury is definitely influenced by the process of the merger, if the merge develops into a failure, J Sainsbury’s share price may drop suddenly.

Reference list

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