Tesco: Buy, Sell, or Hold?
September 18, 2012
Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue chip index.LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.
I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!
I'm assessing every share on five different measures. Here's what I'm looking for in each company:
- Financial strength: Low levels of debt and other liabilities
- Profitability: Consistent earnings and high profit margins
- Management: Competent executives creating shareholder value
- Long-term prospects: A solid competitive position and respectable growth prospects
- Valuation: An underrated share price
A look at TescoToday I'm evaluating Tesco (LSE: TSCO.L ) , a U.K.-based multinational retailer that also engages in general merchandise, telecom, banking and insurance services,which currently trades at 346 pence. Here are my thoughts:
1. Financial strength: Tesco has relatively modest gearing with net debt of 52% of tangible equity. The balance sheet is solid, backed up by property assets worth 36 billion pounds and interest cover of 15. I do not foresee any problems with liquidity as free cash flow generation has been strong -- averaging 2.5 billion pounds the past three years -- and will only improve with the company's intention to decrease capital expenditures and keep it below 5% of sales the next few years.
2. Profitability: Tesco's performance this past decade has been impressive, consistently delivering ROEs of 16%, compounding sales by 10% and earnings by 12% annually, while keeping operating margins at 6%. For the past five years, international sales and operating profits have grown by 14% and 8% per annum, respectively. Also, the company's online retail business has been highly successful, with Tesco now the world's largest and most profitable online grocer with revenues of well over 2 billion pounds. Moreover, the company has profited from its strategy of releasing the value of its property portfolio, gradually selling off property assets the last few years.
3. Management: After 14 years, CEO Terry Leahy has stepped down and has been replaced by Philip Clarke on March 2011. Admittedly, Leahy will be a tough act to follow -- during his tenure, sales have more than doubled and earnings have tripled, while the business has expanded into 13 countries, in the process becoming the world's third largest retailer. Nevertheless, Philip Clarke appears to be an able replacement -- he has been with Tesco for 36 years and was a huge part in the company's expansion into the international market.
4. Long-term prospects: Despite its recent struggles, Tesco still leads the U.K. with a market share of 30%, followed by Wal-Mart's ASDA on 17%, Sainsbury's 16%, and William Morrison's 12%. It has invested 1 billion pounds to revitalize U.K. operations, while its international business has been growing rapidly and now accounts for 32% of revenues. In fact, the company has managed to become the leader in most of its markets outside the U.K.
5. Valuation: Tesco's current market cap of 28 billion pounds is significantly lower than the current market value of its properties pegged at 36 billion pounds. Its forward price-to-earnings ratio of 10 is at the lower end of its 10-year historical P/E ratio, and it currently gives an attractive dividend yield of 4.39%.
My verdict on TescoAlthough past performance is not indicative of future results, I believe Tesco can duplicate last decade's performance. Its fundamentals remain solid despite recent struggles in the U.K., while its international operations, burgeoning general merchandise and retail services -- banking, telecom and online store -- and property development strategy provide huge growth potential. Furthermore, the market value of its properties provides a significant margin of safety while its stable dividend yield, which has been growing by 10% for the past 10 years by the way, will reward investors while waiting.
So overall, I believe Tesco at 346 pence looks like a buy.
Tesco says Fresh & Easy "fighting nicely"
* CEO says worth persisting with Fresh & Easy
* Says changes having an impact on business
By James Davey
LONDON, Sept 19 (Reuters) - Tesco's loss-making Fresh & Easy chain in the United States is "fighting nicely" in a tough market, the chief executive of the British retailer said on Wednesday, underlining his belief that the chain can have a profitable future.
Tesco boss Philip Clarke has this year rejected investor calls to withdraw from the United States, though he told shareholders at their annual meeting in June he would pull the plug on the business if it continued to disappoint.
Speaking at the World Retail Congress (WRC) on Wednesday, Clarke gave the West Coast chain, which trades from nearly 200 stores, a renewed vote of confidence.
"The stores that we have continue to grow nicely and the reason it's worth persisting is that the stores themselves fulfil a particular need for a particular group of customers," he said.
"It's only five years old, it's playing in a play ground with some very big and very old retailers who are very wise and it's fighting nicely."
In April, Clarke said he did not expect Fresh & Easy to break even until its 2013/14 financial year, against a previous target of 2012/13.
Tesco, the world's third-biggest retailer, has slowed its expansion plans for Fresh & Easy and though the chain's underlying sales growth slowed to 3.6 percent in its fiscal first quarter from 12.3 percent in the fourth quarter of the previous financial year, the CEO said operational improvements, such as new product ranges, were having an impact.
"Already the changes that we've been making have gone some way to prove that's there's life in Fresh & Easy yet," he said.
"We'll continue to hopefully see those sales grow and it move towards profitability."
Once one of the most consistent British companies in terms of earnings growth, Tesco stunned investors in January with its first profit warning in more than 20 years.
In April, Clarke, a Tesco career lifer who as a youth stacked shelves in his local store, also slashed expansion plans for the business in Britain and said he would spend over 1 billion pounds ($1.63 billion) on improving stores and online shopping in a bid to reverse a decline in market share.
Tesco will report first-half results on Oct. 3.
In his speech at the WRC, Clarke said digital technology was shifting the "tectonic plates" of the retail industry. He expected that this Christmas one in five online orders in the UK would be made on a mobile device.
Shares in Tesco, down 8 percent over the last year, were 0.2 percent lower at 343 pence at 1350 GMT, valuing the business at about 27.7 billion pounds.
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