Are shares in Tesco still worth buying?

By Associate Editor David Stevenson Jul 26, 2011

What’s new?

On 14 June 2011, Tesco (TSCO) issued a first-quarter management statement.

Group sales (including VAT and petrol) for the three months to 28 May 2011 were 7.8% up on the year before, with international revenues 9.1% higher. The UK saw 7% growth, though ex-petrol and on a like-for-like basis, the increase was just 1%. “Tesco has made a good start to the new financial year”, says the statement. “The overall performance of our businesses in Asia and Europe has again been pleasing, while our UK business continues to grow faster than the industry as a whole”.

What is Tesco about?

With over 2,700 stores and 290,000 employees in Britain, Tesco is the country's top retailer, taking £1 in every £8 spent in UK shops. In food sales, it has a UK market share of more than 30%, while a move into retail banking, ramped up as the financial crisis was destroying faith in mainstream banks, has won Tesco Bank more than six million customers. It's also big outside Britain – it's the world's fourth-largest grocer, with around a third of its total revenues generated abroad. Asia accounts for 17% and Europe 15%.

What's the history?

Jack (later Sir Jack) Cohen started it all in 1919, selling groceries from a stall in London's East End. His first day's profit was £1 on sales of £4. The first own-brand product sold was Tesco Tea, named from the initials of TE Stockwell, a partner in the tea supplier, and the 'CO' from Jack's surname. The first store to be opened – based on the 'pile it high, sell it cheap' format – was in Edgware in 1929. Tesco floated on the Stock Exchange in 1947. Annual sales hit £1bn in 1979 and doubled three years later. In 1995, Tesco began expanding globally. Annual profits hit £2bn in 2005 and the US Fresh & Easy chain was launched in 2007.

Who runs Tesco?

Recently appointed head honcho is Tesco-veteran Philip Clarke – he’s “slightly more prickly”, says Simon English in the London Evening Standard, than Sir Terry Leahy, who’s gone after 14 years at the helm. Chairman is David Reid and head number cruncher is Laurie McIlwee.

How's the outlook?

With “consumer sentiment in many of our key markets remaining subdued, uncertainties remain”, says Clarke. In Britain, “high fuel costs continue to mean that customers have to direct some of their spending to petrol at the expense of their normal shopping. This remains a drag on both industry and our own like-for-like growth”. But there are still “early and encouraging signs of better performance emerging in both the UK and the US”.

What the analysts are saying

Of the 43 analysts surveyed by Bloomberg, 72% say ‘buy’, 16% see Tesco as a hold and 12% are sellers. The average price target is 18% above the current price. Keenest is Matthew Truman of JP Morgan, whose target is 45% above today. “Earnings growth should accelerate”, says Philip Dorgan at Panmure Gordon. Most pessimistic of recent forecasters is David McCarthy at Evolution – he’s a seller, but sees the shares dropping just 6%. Our view: having undershot the market by more than 20% in the last two years, Tesco looks good value, and the near-4% yield appeals.

Tesco’s numbers…

Tesco share price:

Source: Bloomberg

(Click on the chart for a larger version)

Stockmarket code: TSCO Share price: 396p
Market cap: £31.7bn
Net assets (stated end-Feb 2011): £16.5bn
P/E (consensus forecast, current year): 10.9
Yield (consensus forecast, current year): 3.9%
Geographic ownership: UK 38%, US 37%
Biggest shareholder: Blackrock 5.2%

…and directors' dealings

Tesco directors have been busy bees over recent years. The 12 months prior to our last review of the stock at end-April 2011 saw some chunky sales, though these were more than offset by buying under the firm’s share plan and stock option scheme. Since then the two-way trading has continued. In May, Andrew Higginson unloaded 94,250 shares while David Potts sold a net 150,000 shares two weeks ago. But at the same time Tim Mason acquired 250,019 while Laurie McIlwee picked up 67,889, both via the firm’s share plan.

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