Things are going from bad to worse for Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US). Not only has it overestimated forecast profit to the tune of £250 million, it has now suspended a further three executives (which brings the total to eight) as it investigates how a FTSE 100 company can be so far out with its investor guidance.
Indeed, the three executives in question are rumoured to be ‘category heads’ and so it is yet another blow for the company’s UK operation after UK Managing Director Chris Bush was previously suspended. Furthermore, if today’s other rumours surrounding Tesco are to be believed, it is considering the replacement of its Chairman, Sir Richard Broadbent, as it apparently seeks a new direction in the post-Philip Clarke era.
Market Sentiment
So, what does this mean for market sentiment? Clearly, investor sentiment in Tesco could get worse before it gets better. That’s because there could be more negative news flow to come, with the company’s own internal investigation due to report on 23 October. Furthermore, the FCA intends to launch its own investigation into the company, which could prove to be rather long-winded and, as a result, keep investor sentiment pushed back.
Bad News Priced In
However, it could also be argued that most of the bad news is now already priced in to Tesco’s share price. In other words, it would take a majorly negative piece of news flow (such as another £250 million overstatement) to hit shares hard again. After all, Tesco’s share price has fallen by a whopping 21% in the last month alone and the company trades on a price to earnings (P/E) ratio of just 9.9 using next year’s lower earnings numbers.
Future Potential
In addition, Tesco remains a financially sound and highly profitable business that can easily afford its current yield of 3.3%. Certainly, it faces the dual threat of a hugely challenging marketplace, with no-frills operators such as Aldi and Lidl eating away at its market share while, at the same time, it must deal with internal complications resulting from the overstatement of profit guidance.
However, for investors with a long term view, this is a chance to buy shares in a high-quality company that continues to have a bright long-term future for a very low price. Indeed, even after more executives have been suspended, Tesco remains a highly attractive long-term play that could boost your bottom line.
