“No expectations, no disappointment” is an old cliche, but expectations go to the heart of finance and valuation models, and are the essence of investment strategies. If I had to single out one company that could build its fortunes and those of its shareholders upon expectations, that company would be Tesco (LSE: TSCO).
In this context, Ocado (LSE: OCDO) could also continue to surprise investors, although its shares seem a bit pricey based on its latest financials — but, elsewhere, I’d rule out any meaningful short-term upside for IGAS Energy (LSE: IGAS), whose stock could entice opportunistic traders, but carries to much risk right now.
Tesco: My Favourite Restructuring Play In The Market
Tesco is carefully managing expectations, specifically with regard to its underlying trading profit, or core operating income. The number that the market has in mind this year is between £1.3bn and £1.4bn.
Chief executive Dave Lewis is clearly focused on shareholder value, so I’d expect upside on this front in the next few quarters — furthermore, disposals will materialise sooner rather than later, which will contribute to value creation. Tesco is not desperate to sell its assets, and negotiations can last as long as necessary, as recent deal talk has shown.
Its shares rose on Friday (up almost 4% at one point) in the wake of a trading update for the 13 weeks ended 30 May, which showed:
- UK like-for-like sales down less than expected at -1.3%;
- UK volumes and transactions up (volumes +1.4%; transactions +1.3%; 180,000 more customers are currently shopping with Tesco on a comparable basis).
Notably, trends over the last five quarters point to a significant improvement in performance in a deflationary environment. If I am right, its earnings bottomed out between the second and the third quarter of last year, so its underlying income could be higher than that pencilled in by many analysts.
I am less concerned about its international business, but things aren’t too bad there, either — which is very important because Tesco needs buyers for assets that will likely be sold over time (if the price is right). It currently trades at a 10% discount to their value of its assets, and I’d certainly add its stock at 213p to a diversified portfolio.
Ocado: I’d Retain Exposure
Around mid-May, I argued in favour of an investment in Ocado at 393p, and I haven’t made up my mind after today’s trading update, but am only cautiously optimistic now.
“Ocado is closing in on its first technology deal with an overseas retailer, it said on Tuesday, disappointing investors who had hoped for news of a firm transaction,” Reuters reported today.
According to the news agency and several other reports, Ocado came under pressure in early trade today (-5.5%) due the lack of concrete details about new partnerships.
That’s a possibility, but weakness in its stock price should also be attributed to its latest financials: rising sales (+15.7%) and Ebitda (+11.4%) caught my attention, but so did its flat pre-tax profit, 30% lower cash and cash equivalents on the balance sheet and rising net debts.
That said, its stock bounced back during the trading session, and even managed to trade in positive territory (431.5p) at 14.05 BST. In truth, I’d retain exposure if I were invested, but I’d probably need more evidence to snap it up at 430p a share (which is close to its highs for 2015, and only 22p lower than its 52-week high).
IGAS Is Down For A Good Reason
IGAS is down 30% in 2015, and has lost 10% of values this week alone.
It’s not the strongest player in the sector financially — and the sector where it operates is highly promising, but also highly regulated.
“British local government officials rejected a fracking project in northwest England on Monday, dealing a blow to Britain’s shale gas sector that is supported by Prime Minister David Cameron’s government,” Reuters wrote on Monday, only a few days after reporting that Britain needed a new regulator for onshore underground energy.
“Shale gas companies must engage with local communities more effectively before a UK shale gas industry can be developed, a task force examining the sector“, Reuters said last week.
In this climate, I am happy to give it a pass for the time being.
