Thursday 14 December 2017 ShareProphets: The one stop source for breaking news, expert analysis, and podcasts on fast-moving AIM and LSE listed shares


Tesco - a recovery buy

By Chris Bailey of Financial Orbit | Friday 6 October 2017


Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Imagine the scene, if you will, on the trading desks of a professional investment house after Tesco (TSCO) just puckered up its interim results. Another quarter of like-for-like sales growth, free cash flow generation chivving down the debt burden, margin targets for later in the decade reiterated and - stone the crows! - the interim divvy is back. Fingers would be tapping away sending little messages to your favoured clients or internal portfolio managers. You can imagine what is written: “Tesco’s is back!”, one message might read. Another would undoubtedly exhort the reader to buy the stock.

Well that stock that started up 2% early doors buoyed by such chatter, ended the day down 3% odd - that’s just like the taste you get in your mouth after too many Value products, too quickly. And the share price impact pushed the stock to about the same level it was when I last wrote about it earlier this year. The trouble is Tesco might be the biggest UK food retailer with phenomenal buying reach, a store in most neighbourhoods and a profitable online delivery capability but it is a very divisive stock.

Everyone can see the high level of competition in the supermarket sector and whilst food prices have gone up recently (historically a great cover opportunity for the sector to raise prices a bit more than required) that is just thanks to the lower Pound raising import prices. Sales growth has had to be gained the hard way. Meanwhile ‘quality’ focused investors are put off by the accounting scandal (playing out currently in the courts), whilst income devotees are not going to be bought off by a handful of pence of full year dividend even if it is better than a zero. ‘Tesco Dave’, the CEO, hardly sugarcoated it on the conference call either noting the tricky old backdrop - and that would be that except that - whisper it quietly - Tesco stock is cheap if the company hits those 3.5-4% margin targets before the end of the decade.

Now when you are punching out margins of around half that level this should be of little surprise. Frankly near double the margins of most companies out there and their shares would have a romp of some magnitude. The chances of doing it with the consumer and competitive backdrop we are likely to have for the next little while probably depends on beating up (sorry, ‘working closely with’) its suppliers again in combination with quietly hawking up prices to us all whilst the rest of the supermarket fraternity acquiesce. It might work, but it might not. More tangibly positive is the cash flow side. Obviously it has squeezed hard, fiddled with the pensions methodology and related. The risk of a money raising - except associated with the super-smart move to try to buy Booker (BOK) - has further receeded looking at the numbers and that ultimately can only be good for the share price and a slow increase of the dividend.

Putting it all together the image that comes to mind is Dirty Harry uttering his famous catchphrase. Given the highly divisive views the investment community has on the stock, trading opportunities should be reasonable as the stock climbs a wall of worry. If I squeeze my eyes together and keep my fingers crossed I can see the stock back at the current 52 week highs of around 220p at a point over the next year. In one line, right here right now, I do feel lucky (punk). Maybe then the burnt fingers on the trading desks would have healed and those pro trader types will be prepared to put their head above the parapet again.

This first went out on Fivefreesharetips.com - to sign up for free to catch our next hot share tip go to Fivefreesharetips.com


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