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Tesco - post the Xmas update...still more opportunity than threat

By Chris Bailey | Thursday 11 January 2018

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.

It was only yesterday on this site that I wrote: 'One of the hardest things for less experienced stock market participants to get their heads around is the expectations game. Numbers can be good (or bad) but if the teenage scribbler analyst, ‘professional’ fund managers and ‘the great unwashed’ in the form of other market participants broadly already think something, then confirmation of this event is not going to really change the share price needle. Of course as a consequence companies then start to try to become clever in managing expectations in order to 'beat' anticipated numbers...but that's for another time'. It is clear that Tesco (TSCO) either did not get the message or the animal spirits of those teenage scribbler analysts got the better of them…

This is as despite having its best Christmas in eight years, shares in the UK's largest supermarket are down over 3% as I write. How so? Well once again we have to enter the land of expectations.

You see, Tesco achieved a like-for-like sales increase during its fiscal third quarter of 2.3% in the UK and Ireland, and then for the six-week festive trading period to 6 January, like-for-like growth was 2.0%. Versus recent history this is heroic but not when 'the consensus forecast was for 2.4% for the third quarter and was even higher for the Christmas period at 2.8%, with some analysts expecting at least 3% for both'. Those damn analysts getting too excited about prospects!

Actually there is one mitigating factor - but ultimately one that the Tesco investor relations team should really have communicated better about - and that is the impact of the Palmer & Harvey trading debacle which impacted the company specifically as one of its key customers. As today's RNS notes: 'Incorporating Palmer & Harvey volumes and complexity during a record volume period was challenging, leading to lost tobacco sales across December and putting further strain into our distribution network, particularly post-Christmas. Whilst these challenges have been resolved, the impact of lost tobacco sales on our six-week overall UK like-for-like sales performance was c.(0.5)%'.

Guess what the analysts didn't factor in...! Aside from all this noise, underlying trends remain spot-on and consistent with the bull story I talked about in October. Convenience, online and fresh food unsurprisingly remain particular growth areas and even though today's numbers were really all about sales, the company's management team did note that the turnaround plan remained fully on-track.

As I noted a quarter or so ago a reasonable expectation on this journey towards not just better sales but also - and very importantly - better margins (and continued cash flow generation to chivvy down debt) suggests a re-attainment of the 220p+ share price area. Today's local difficulty is more of an opportunity than a threat - and you can safely ignore the doomsters looking at recent historic P/E ratios and the current yield. As always it is about where a stock is (expected to be) going and not where it has been or is. If I had no Tesco stock then would I buy some today / around 2 quid a share? Absolutely.

As I noted in my write-up of the Morrison (MRW) numbers earlier in the week, the big supermarkets have worked out how to sharpen up their act. And as sector bears remain in the ascendancy, expectation changes will again be more of an opportunity than a threat.

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