SBRY (Sainsbury) released a trading statement today, which @SandyMidd tweets as “Sainsburys trading statement positive despite market reaction. Sales up 2.7% and LFL up 0.2%. Will probably put Tesco in shade. Strong HOLD.”
The market reacted positively to the statement at the opening, but its shares are now down 1.76% on the opening to 362.4p at 10:03.
So. Sainsburys. What’s it worth?
To answer that question, I thought I’d use the CAPM. I’m going to be really lazy about it, too!
The simplest model to employ – and I actually think it’s quite realistic – is the Gordon Growth model:
p = d (1+g) / (h-g)
p – is our estimate of value for the share price – what we are trying to calculate
d – current dividend
g – growth rate
h – hurdle rate
rf – riskfree-rate
b – beta of the stock
erp – equity risk premium
“d” is easy enough to calculate – I just take analyst figuresm whichis 17.65p
“g” growth rate. You can get any answer you want for p by tweaking this one. I’m going to use the riskfree rate, which Aswath Damodaran favours for long term projections. He recommends using a 10-year riskfree rate. I’m using 10-year gilts, which gives me a value for rf and g on 2.95%.
“h” hurdle rate. If you recall from the CAPM,
h = rf + b * erp
There’s a whole can of worms involved in coming up with betas and equity risk premiums. Luckily, Damodaran recently computed the erp for the US, and came up with a value of 4.96%. If I wanted to make work for myself I could try to work out what the ERP should be for the UK. In the past I noticed that the UK and US are fairly similar, so I’m going to be lazy and use 4.96%. Incidentally, the ERP is quite high by historical standards, which should be bullish for stocks. But I digress.
Digital Look shows the beta for SBRY as 0.76. That struck me as surprisingly low. MRW has a beta of 0.72, and TSCO is 0.94. Walmart has a beta of 0.29, which is amazingly low, and perhaps even more suspicious. If I wanted to be thorough, I could start with some industry unlevered beta. Domodaran shows unlevered beta for the retail/wholesale food sector to be 0.58, with a levered median of 0.68. Anyway, I’m not going to fiddle around with that. I’ll take the beta as 0.76, which seems as good as anything, and likely to be fairly conservative.
h = 0.0295 + 0.76 * 0.0496 = 0.0672
p = 17.65 * 1.0295 / (0.76*0.0496) ~= 480p
There we have it. A FV of 480p against an actual price of 362p. I think dividend investors should do well.