It's hard to find any bad news in this mornings interim results from Tesco, but is it a buy?
It's hard to find any bad news in this morning's interim results from Tesco
(LSE: TSCO)
, and I looked pretty hard. "Political uncertainty" in Thailand is the only slight downer, and I don't regard that as a significant cause for concern. Consider the following:
- Group sales up 12.7%
- Profit before tax up 10.3%, exceeding £1bn
- Underlying earnings per share up 10.8%
- Results beating analysts' forecasts
To maintain growth in a business of this size -- sales were nearly £23bn in the first half-year -- it's necessary to fight on a number of fronts, and that's what Tesco is doing:
- International expansion: Opening stores in US next year; continued expansion in China, Japan, Korea and elsewhere.
- New formats: trials have begun of Homeplus non-food only stores.
- New routes to market: Tesco Direct have started offering non-food products by catalogue, in addition to on line, challenging the likes of Argos.
- New products: In a separate announcement yesterday, Tesco will introduce own-brand software, including an office suite for under £20.
These developments are arguably more significant for Tesco's competitors in these new areas; existing players need to examine their competitive advantages if they are to resist a challenge from Tesco, and one has to ask if any business is exempt from the threat of competition. How much longer before Tesco launches an undertaking service?
While I get nervous when I see a company deviating from its core expertise, it has to be said that Tesco has a enviable track record of expanding both its product offering and its geographical scope. It would be a brave move to bet against it.
And that, in turn, worries me a little; very few analysts have a negative position on Tesco, and that's reflected in the price. I can see why, but in general the best time to buy a share is when the investment world incorrectly regards it as trash. On a forward PE of 16.7 at 368p, Tesco may not be a bargain, but you're getting a quality business.
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More: Where Next For Tesco?
