Full-year results from Tesco (LSE: TSCO) should be with us on Wednesday, and they’ll be the first since new CEO Dave Lewis took the helm.
The markets certainly seem to be expecting good things from Mr Lewis, and Tesco shares are up 44% since their recent December low, to 235p — though that’s still less than half their value back in October 2007 before the crisis hit.
What will the results bring, and will they presage the expected turnaround?
Improvement?
In Tesco’s January update, we heard of a “broad-based improvement in the UK business“. To put that into perspective, it meant that like-for-like sales for the 19 weeks to 3 January declined by only 2.9% compared to a 5.4% fall in the second quarter — so it was an improvement in the downward trend of the business rather than in its actual state. But it was enough to keep the current optimism going, even though there is not going to be a final dividend.
For the year, the City’s analysts are forecasting a 68% fall in earnings per share (EPS), which would put the shares on a P/E of over 23. Even if the forecast EPS rises for 2015 and 2016 of 7% and 28% respectively come to pass, that multiple would only drop to 17, which is still a good way below the long-term FTSE 100 average of around 14 — and that would still be with an expected dividend yield of only 1.7%.
If that sounds like an expensive share to you, it certainly does to me. In fact, I reckon Tesco shares are still overpriced now and don’t take into account the full long-term effects of the price wars — and it’s the good things achieved so far that people will focus on when the results are out, not the rest of the pain that is still to come.
Competition
My local branches of Tesco and Aldi are just across the road from each other. Back in the pre-crunch days Tesco always used to be crowded, while wandering round the almost deserted aisles of Aldi was a breeze. Today a trip to Aldi is like playing sardines, while Tesco is the one that’s easier to stroll around without the squeeze. And Aldi (and Lidl) are still cheaper, and still sell stuff that’s just as good or even better.
Are the price wars over? No, of course they’re not. Lidl is cleaning up in TV advertising, emphasizing just how cheap their produce is — while at the same time extolling its qualities. We surely have years of price wars still to come, and years more of expansion from Lidl and Aldi — there are two new ones planned near me, and no new Tesco branches.
Too much optimism
Don’t get me wrong. I do like Dave Lewis, I do think his approach is the right one, and I do think his strategy will be successful. But it just looks to me as if too many people have factored in too much success too soon.
That makes Tesco shares still a Sell in my book.
