Tweeted this tiime last year that UK supermarket giant Tesco has a lot to change in order to compete with the challenge from Aldi and Lidl.
With stock at 1.48 this is pricing net profit margins of around 1.2% – even lower than Sainsbury which is around 1.7% – far from the heady days where Tesco could achieve margins of 3.5%…
With the stock now trading below the 2CentView fair value, the stock is worth keeping an eye on but still risky with market cap = to the debt and the CDS at 300bp, which is below investment grade. Therefore unlikely to pay any signficant dividend. Also, have not seen any significant changes to the Tesco shopping experience.
This is a name which is popular with retail investors – but 2CentView is keep away for now. Some financial engineering is required to reduce debt – and they need to address the shopping experience which has not really changed. Aldi is so so much cheaper and quality is GOOD!
CDS imply Tesco debt is now sub investment grade ("junk").
Analyst revised down their EPS Forecasts aggressively following another profit warning – which imply margins are now around 2% from previous 3%.
According to FT a rights issue maybe required or asset disposals to shore up balance sheet.
As mentioned in last tweet, retail investors are buying tesco based on where it has been recently (nearly 400) and like $JCP, professional investors are looking at CDS levels and future EPS forecasts, both of which imply stock is going lower.
FV now …. 140p. Forecast yield now 2%.
Lewis has a big job on his hands – to get earnings back to the 30p+ area – this can be done by either doubling sales (not practical) or simply improving the bottom line by focussing on higher margin products and better retail experiences.
2CentView is that they need to think about the supermarket experience from being just a shopping trip to much more – e.g. have santa visits over xmas where buyers are given free santa visit and a £5 gift if they spend more than £40 AND focussing on higher margin products like financial services, upmarket home furnishings – clear out the electrical retail crap!
All this will take time and a £4.00 stock price is now is way out in the future, if it all possible.
When news of a criminal investigation hit tesco with stock around 175, the stock dropped a little but has recovered to 194 perhaps signalling that 170 was the bottom as outlined in last tweet.
According to Hargreaves Landsdown, Tesco was one of the top purchases by retail investors in the last month.
2CentView FV on $TSCO = 180, Yield just 3%, payout ratio = 40%, with an earnings recovery in 2018/19.
So do not see significant upside from the current 194 price.
Look to buy on weakness around 170 area if it gets back there, as there other opportunities which are better than Tesco right now – but you may need to wait for any significant capital gain.
$SBRY FV=225 Yield 6%, Payout = 50%
$MRW FV=190 Yield 6%, Payout = 70%
Tesco stock price now half that of what they were a year ago.
2Centview under the Investing Strategy believes it is vital to stick to your stops – we are not aware what fund managers are doing, what analysts are saying to their top clients – we only know that the stock continues to fall …so
- STICK TO YOUR STOPS. If it goes wrong then SELL it ALL. The Fair Value is based on predictions about future earnings which could be out of line with what the market thinks and what the market thinks is more important than what analysts think.
Hargreaves landsdown published the following 10 facts today – but this is all too late for the private investor…
$TSCO CDS widened 40bp today alone – and they are now just one notch above investment grade – so the dividend pay out ratio has to be cut – from 40% to 30% at least – this implies an FV of 190 so the cut has been priced in…
Should you buy here at FV ? 2CentView is that there is no rush to get back into Tesco here. There is a possibility it leverages it’s property portolio – or attracts a bid – so an entry point would be around the 170 area if you believe new management can turn around the company or think a large european rival would make a bid..
Tesco have been hit hard by the recent profit warning and dividend cut – the share price decline from 340 at the beginning of the year has been savage – it operates the best margins among the large supermarket – 5% – but this according to the FT could be cut in half – $SBRY already operate on a 2.5% margin, so the decline has been less severe.
FV=255 – but this does not reflect a potential margin cut to 2.5% as analysts have not downgraded their forecasts yet.
A margin cut to 2.5% would see EPS in the 16p per share region vs 24p current forecast giving
a FV = 225
A further cut in dividend from 50% to 40% would knock off another 20% of this so – 180!
So FV=225 with Floor of 180.
If you decide to buy $TSCO, 2CentView is that you should look to buy between the 225 FV and the floor e.g. around 200 and believe new CEO Dave Lewis can focus on high margin products and services to offset lower margin products like Milk and Cereal. Clarke did’nt nothing for $TSCO!
A bag of Granola costs £2 in ALDI and £4 in Tesco – they are different brands so the price promise doesn’t work, and the £2 ‘Harvest Morn’ ALDI Granola is not that bad!
Sainsbury seems to be holding up against competition from the low end of the market – posting results showing they are not losing market share like Morrisson and Tesco.
FV lower at 345 from 360 as Analysts price lower EPS Forecasts.
$SBRY has quite a lot of short interest, so may go higher as shorts get covered.
At a 5% yield, take some profit above 340 if you got in at the low 300-310 area, but keep some for the yield and potential further upside.
Morrission , FV=180
$TSCO FV = 265
Looking for low beta stocks (less than .75), with dividend yield and upside ? You should have some of these kinds of stocks in your portfolio – if you missed $SSE (now 1425 from 1300 and $DLG), look at the UK supermarkets – they have all traded down since recent highs set early in the year
$SBRY FV=360 Yield = 4.8% px = 339 5Y Implied Growth = 4%
$TSCO FV=324 Yield = 4.6% px=322 5Y implied Growth = 6%
$MRW FV=239 Yield=5% px=232 5Y implied growth = 2%
The other thing supermarkets is the hidden value of the property assets – which is normally in the balance sheet at a conservative valuation – and one of the reasons leveraged buyout funds find them attractive.
2CentView pick is $SBRY – could trade back to highs of 390 – and has 1billion hidden value from the property assets.
Trade: Buy here at 339, TP=385 for 15% upside potential 4.8% carry.