Sainsbury’s first-half earnings: share price stalls as good news dries up

When is Sainsbury’s earnings date?

Sainsbury's publishes earnings for its fiscal first half (H1) on 7 November.

What does the City expect?

Headline earnings per share are expected to fall 12.6% to 9p, while revenue is forecast to drift down 0.6% to £15.03 billion. Pre-tax profit is forecast to fall to £262 million.

Sainsbury’s continues its efforts to put the failed Asda merger behind it. It has still to solve the conundrum of increasing sales in a UK supermarket environment that is highly competitive but mature – significant growth is hard to come by as it looks to outdo larger rival Tesco and the more nimble competitors Aldi and Lidl. Sainsbury’s does plan to continue its store opening programme, but at a relatively moderate pace’ 75 new convenience stores are expected in the next year, along with a fresh push in the online retail space. In addition, it continues to target £500 million in cost savings by 2024, even as an extensive store refurbishment programme continues. This effort has already paid dividends, although it will be interesting to see if momentum can be sustained.

The H1 figures will have to overcome stiff comparatives with the previous period, when warm weather boosted sales. Food sales in the UK remain under pressure overall, so promotions and careful discounting will be a key element of performance.

At 10.5 times earnings, Sainsbury’s is one standard deviation below the five-year average valuation of 12.1. While it is not as cheap as the multi-year low of 8.7 seen in September, it remains cheap compared to the 2018 peak at 16.2 times earnings. A 5% dividend yield remains attractive, and is well covered at two times earnings despite growing at an average of 4.5% over the past five years.

How to trade Sainsbury’s earnings

The average move on results day for Sainsbury’s is 5.9%, versus an implied move of 5.3% at present, and this compares to a current 14-day average true range of 2.54%. Traders and investors can therefore expect a significant uptick in volatility for Sainsbury’s shares on results day. On 1 May, when annual results were released, Sainsbury’s jumped 4.2%.

Of the 20 analysts covering the shares, seven have ‘buys’, ten have ‘hold’ recommendations, with three ‘sells’. The current median target price of 237p is 12% higher from the 25 October close of 212.5p.

Sainsbury’s share price: technical analysis

The 2019 low for Sainsbury’s at 177.1p was the lowest level in 30 years as the downtrend from the August 2018 continued. However, the price rallied from this low and surged to 220p. A pullback into early October found support around 200p, which may indicate that a higher low had been established. Gains since September have been constrained by the 200-day simple moving average (SMA) which is currently at 215.95p, risking a possible turn lower for the price.

If the October low at 201.8p holds, then the price may be able to break above 220p, and would then challenge 230p and the lower end of the February gap down at 244p. A close below 200p opens the way to the 180p lows from August and marks the resumption of the broader downtrend.

Sainsbury’s bullish case faces major hurdles

Sainsbury’s is cheap, but it is cheap for a reason. A solid dividend and an undemanding forward price-to-earnings ratio may provide hope, but the technical picture remains uninspiring. The shares must now push on through their October highs to avoid the impression that the downtrend of the past year is resuming.