JPMorgan double upgrades Sainsbury’s and Tesco to ‘overweight’

The bank said its ‘underweight’ stance on most of the sector since September 2023 has turned out to be a game of two halves, with EU names down 5% versus the UK up 4% and the Stoxx Europe 600 retail index up 16%.

"Our view into 2025 is more balanced and varies by market, in particular more constructive on the UK, while we believe that the EU food retail sector will move into stock-picker territory," it said. "As a result, we update several recommendations based on our recent analysis"

JPM upgraded both Sainsbury’s and Tesco to ‘overweight’ from ‘underweight’. The price target for Sainsbury’s was upped to 310p from 304p, while the PT for Tesco was hiked to 420p from 270p.

JPM said it sees upside risk to the FY25-26 outlook and consensus, noting that this was its first ‘overweight’ on Sainsbury’s.

It said the UK grocery market should remain rational for longer.

"We assume the improved execution and relative price positioning at both TSCO and SBRY continues, in sharp contrast to strategies of margin preservation/maximisation at key rivals Asda/Morrison and discounters (circa 40% combined market share); we think that, in 2025, there will be higher price inflation, underpinned by an industry-wide pass through of cost inflation.

"This shall entail a constructive gross margin/CF/capital return outlook and therefore our above-the-Street expectations."

JPM said the recent pullback in Tesco and Sainsbury’s creates a good entry point into Christmas, with shares trading on 10-12x price-to-earnings and 9-10% free cash flow yield.

It said the thesis does not apply to ‘underweight’ rated B&M European Value Retail as it faces company specific issues.

At 1220 GMT, Sainsbury’s shares were up 2.5% at 259.80p, while Tesco was 1.5% higher at 363.40p.