I’m shopping for shares right now, should I take Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) to the checkout?
The king is dead
The king of the British high-street has lost its crown. Barely two years ago, Tesco ruled the UK and looked set to conquer the world. Then hubris struck, in the shape of a 25% big share price drop in January 2012, followed by a bungled US invasion, shrinkage in Asia and that horsemeat scandal. I have remained a faithful retainer throughout tumbledown Tesco’s troubles, but am I loyal enough to buy more today?
Tesco’s share price is down a disappointing 4% over five years and 8% over three years, against increases of 23% and 28% respectively for the FTSE 100 as a whole. But it is showing signs of life, rising nearly 8% in the last month to today’s price of £3.63. As an existing investor and occasional shopper, I’ve been pleased by Tesco’s campaign to make its big box outlets more appealing. I have found them alienating for some time, and I’m clearly not alone. Broker Exane BNP Paribas has just raised its rating for Tesco as a result, although I suspect a larger store overhaul is still needed to tempt those lost shoppers.
Not so nice price
In these cost-conscious days, when inflation is rising faster than pay packets, Tesco is trailing rival supermarket Asda, according to Morgan Stanley’s latest AlphaWise UK Food Retail Price Tracker. A sample shopping basket is 5.2% cheaper at Asda than Tesco, the largest difference for two years. Waitrose can get away with charging more, I don’t think Tesco can. So that’s another concern. Morgan Stanley is accordingly ‘underweight’ on the stock.
I was surprised to see Tesco still throwing money in the direction of former boss Sir Terry Leahy, who left the company a full two years ago. He has picked up post-retirement payments worth £8.5m since then, in yet another tale of corporate excess. But while his bank balance continues to swell, his reputation has been shrinking, following claims that he “lost the plot” in his final years, leaving a poor strategic legacy. News that Tesco splashed out nearly £25m on private jets for senior executives since 2005 confirms suspicions that management is playing fast and loose with company money. Who do they think they are, royalty?
Despite my reservations, Tesco still looks like an opportunity to me. Trading at 10 times earnings, against 13 times for the FTSE 100 as a whole, some of its troubles are reflected in the price. Credit Suisse recently noted that it is now the lowest-rated large-cap food retailer in Europe. I am hoping that its costliest problems are now behind it, including a £1.2bn Fresh & Easy write-down and another £800m write-down on 100 sites it will no longer develop. UK food sales may recover, as the horse meat scandal whinnys into the distance. If we get some good sales news later in the year, either in the UK or overseas markets such as Korea and Thailand, the share price could rally from today’s moribund loans.
Income opportunity
Tesco’s yield of 4.1%, covered 2.4 times, looks crunchy against the FTSE 100 average of 3.5%. Earnings per share growth of 2% to February 2014 is less wholesome, but it is forecast to rise to 5% and the subsequent 12 months. If the UK economy really is starting to recover, that will also help. Tesco’s crown has slipped, and I suspect it will never recover its throne. But now could still prove a royal buying opportunity.
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> Both Harvey and The Motley Fool own shares in Tesco.
