3 Ways J Sainsbury plc Will Continue To Lead Its Sector

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Right now I'm comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.

Today I'm looking at J Sainsbury plc (LSE: SBRY) (NASDAQOTH: JSAIY.US).

Valuation

As always, let's start with the basics and there is nothing more basic than a simple comparison of Sainsbury's valuation in relation to its closest peers and the wider sector.

In particular, Sainsbury's trades at a historic P/E of 12.9, which is actually slightly lower than the food & drug retailers sector average historic P/E of 13.8.

Furthermore, Sainsbury's closest sector peers, Morrisons (LSE: MRW) and Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) trade at a historic P/E of 10.3 and 10 respectively. So on a valuation basis, Sainsbury's looks more expensive than its closest peers but cheaper than the wider sector.

Actually, this is slightly confusing but I believe that the best comparison is with Sainsbury's closest peers, Tesco and Morrisons, and on that basis the company looks expensive.

Balance sheet

Net-debt-to-assetsInterest cover by operating profit
Sainsbury17%7x
Tesco16.6%8x
Morrisons20%13.6x

Now, on to the balance sheet and we can see that Sainsbury's net debt is about the same as that of its peers.

However, while peer Morrisons has borrowed heavily to fund its expansion during the last five years, Sainsbury's has kept debt relatively stable. In particular, during the past five years Morrisons debt has expanded 150% while Sainsbury's net debt level as a percentage of assets has fallen.

Company's performance

Earnings growth past five yearsNet profit margin
Sainsbury54%2.6%
Tesco24%4.4%
Morrisons53%4%

This is where it gets interesting, as many investors have assumed that Sainsbury's is the fastest-growing supermarket of the trio, which is why the market has placed a high valuation on the company.

Nonetheless, looking at earnings growth figures for the past five years, Sainsbury's growth has been in line with that of peer Morrisions. What's more, Sainsbury's actually reported a lower net profit margin that both of its peers for the last reported financial year.

Still, we need to bear in mind that Morrisons has borrowed heavily to fund its growth during the past five years, while Sainsbury's has reduced its debt as a percentage of assets.

Foolish summary

All in all, Sainsbury's is currently trading at a premium to its closest peers but I believe that the company has earned this prestige. The company's earnings growth during the past five years has been impressive, considering debt as a percentage of assets has fallen but the lower than average net profit margin is of concern.

That said, overall I feel that Sainsbury's is a much stronger share than its peers.

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> Rupert does not own any share mentioned in this article. The Motley Fool owns shares in Tesco and has recommended Morrisons.