Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) announced a change of corporate brokers last week, ousting Cazenove and Nomura in favour of Barclays. It was seen as punishment for downgrades from the two brokers: Cazenove lowered its forecasts in March and Nomura followed suit earlier this month.
So there’s some irony that Barclays has just published a less-than-enthusiastic broker’s note on the supermarket chain, keeping its ‘equal weight’ rating but lowering its earnings estimates. The bank is expecting mixed results when Tesco’s half-year figures are released next week. It thinks UK margins will hold up, but is forecasting poor performance from Tesco’s international operations with a like-for-like decline in sales.
Cazenove has also downgraded Tesco and the latest Kantar Worldpanel survey shows a slip in the supermarket’s market share in the past quarter from 30.9% to 30.2%. The triple whammy over two days knocked 3% off Tesco’s shares.
Short-termism
To me, this exemplifies the short-termism of the City. It’s true that Tesco has been losing ground rather than winning in the trench warfare of UK grocery market shares. The four middle-ground supermarkets have been squeezed by top-end Waitrose and bottom-end Aldi and Lidl, with only Sainsbury’s improving.
But fractions of percents of market share are for analysts, not investors. The important fact is that Tesco controls 30% of the market, nearly double its nearest competitor. That’s a massive advantage. It’s one reason why Tesco has been the pioneer of the sector, trend-setting with hypermarkets, convenience stores, online sales, non-food goods, banking, other financial services and international expansion. Inevitably, some of those initiatives have worked better than others.
Turnaround
It’s also a very strong position from which to launch its turnaround plan, which is bound to take some time to produce results. Progress on that is more significant than current market share — notably Barclays’ analysts were impressed with Tesco’s next-generation Extra store at Watford. And the troublesome operations in the US have finally been disposed of.
It’s the fundamentals of Tesco’s market position that I find attractive as an investor. I guess it also factored significantly in Sage of Omaha Warren Buffett‘s decision to invest in the company. His investment style, famously saying his ideal holding period is ‘forever’, is the very antithesis of City short-termism.
A buy
Still 10% below their price before the infamous profit warning, Tesco’s shares are trading on a prospective P/E of 11.6 and rate a ‘buy’ in my book.
