Questor share tip: Tesco is solid not spectacular
Many of the retailers in the UK are having a tumultuous time – and Tesco is no exception. Short-term challenges remain, but the long-term growth story is intact.
Many of the retailers in the UK are having a tumultuous time – and Tesco is no exception. Short-term challenges remain, but the long-term growth story is intact.
7:00AM GMT 09 Dec 2011
Tesco
397.2p+0.3
Questor says BUY
397.2p+0.3
Questor says BUY
UK same-store sales fell by 0.9pc in the third quarter of the year when petrol and VAT are excluded – the fourth consecutive quarter this has happened. Obviously, the recent “Price Drop” has had a deflationary effect, but Tesco says that this has resulted in stronger food volume growth – adding 1pc to volumes. Under the scheme, Tesco cut the price of 4,000 items to attract new customers.
In April, Tesco’s new boss Philip Clarke admitted that the company’s UK performance wasn’t good enough.
“We didn’t achieve our planned growth in the year and this was only partly attributable to the deterioration in the consumer environment during the second half. We can do better and we are taking action in key areas – for example, to drive a faster rate of product innovation and to improve the sharpness of our communication to customers,” Mr Clarke said.
These results have demonstrated that the turnaround has not yet happened in the company’s home market – but Questor feels confident that a turnaround will eventually come. Indeed, if inflation behaves how analysts predict next year, this could be a positive for the whole retail sector as the squeeze on household budgets eases.
RBS is forecasting that price rises as measured by the Retail Price Index (RPI) will fall from 5.4pc in October to 2.4pc by the end of 2012 and hit 1.9pc in 2013.
The group’s operations in Thailand were also impacted by the disastrous floods last month. Like-for-like sales growth in the Asian nation fell to 1.4pc in the quarter compared with growth of 7.5pc in the second quarter of the year. In total, 100 of its Tesco Lotus stores in the country are still not operating, although they are all expected to reopen by January.
Results for the group as a whole were in line with market expectations. In the 13 weeks to November 26, sales including petrol rose 7.2pc and 5.4pc when fuel sales were excluded.
The one thing that differentiates Tesco from its UK competition is international footprint. This is arguably why Warren Buffett, the world’s most famous investor, bought in to the company in 2007. Last month, Mr Buffett picked Tesco as his top European investment for the long-term investor.“If the price came down some on Tesco I’d buy some more of that,” he told CNBC.
Like-for-like sales in the US rose 11.9pc, which is a slowdown on the 12.4pc seen in the second quarter. The operation is still not profitable.
Same-store sales in the Czech Republic fell 0.3pc, with like-for-likes in Turkey down 2.6pc and in Malaysia 5pc lower. Tesco put the falls in Turkey and Malaysia down to the later timing of Ramadan this year.
Management is comfortable with consensus expectations, but there is obviously a great deal of caution heading into the key Christmas trading period. As one analyst said yesterday, the results were “solid rather than spectacular.”
The current–year earnings multiple is 11.2, falling to 10.1 and the prospective yield is a respectable 4.9pc, rising to 4.3pc in the year to February 2013.
The shares were tipped as a buy on December 14, 2008, at 329¾p and they are up 20pc, compared with a FTSE 100 up 29pc. They have been tipped as high as 421.85p. The shares remain a buy.