Investor appetite for Tesco (LSE: TSCO) has turned sour again in recent weeks, the stock conceding 5% of its value in February as concerns over the impact of rising inflation up and down the high street have risen. And just today the retailer sank to its cheapest for exactly five months.
You have to take your hats off to Tesco and applaud the success of its sales turnaround during the past year. When it looked as if the game was up for Britain’s mid-tier grocers, the Cheshunt chain upped the ante by investing huge sums in customer service improvements and brand development, schemes that have chimed well with customers.
However, with inflation steadily gaining pace and wage growth retreating, signs are growing that Britain’s shoppers are once again flocking into the arms of the German value chains. Latest Kantar Worldpanel data, for example, showed Tesco’s sales growing 0.3% during the 12 weeks to January 29, cooling from the 1.3% rise printed in the prior month.
By comparison, Aldi and Lidl saw takings leap 12.4% and 9.4% in the three months to end-January, speeding up from advances of 11.8% and 7.5% advised in the last release.
It appears that Tesco will have to keep slashing prices to stop the budget giants running clear again. And with sterling weakness playing increasing havoc with the supermarket’s cost base, this could have a devastating effect on its margins.
I reckon a forward earnings multiple of 19.4 times fails to reflect the hard work Tesco has in front of it to keep the budget players at bay, particularly as the retail giant’s rivals chuck billions over the next five years at expanding their UK footprint.
Bank still in bother
Banking mammoth Standard Chartered (LSE: STAN) also saw its share value turn 5% lower last month and away from two-and-a-half-year peaks as investors fretted over macroeconomic turbulence in its core Asian markets.
StanChart released a mixed bag of full-year results in February. On the sunny side the bank moved back into the black in 2016 and recorded pre-tax profit of £409m versus a loss of £1.5bn in the previous year.
Having said that, chief executive Bill Winters commented that “our financial returns are not yet where they need to be and do not reflect the group’s earnings potential.”
And with good reason — Standard Chartered continues to suffer massive charges from its vast restructuring programme, while revenues at its core operations also continue to disappoint. Total revenues at the financial play fell 11% last year. And worryingly the business warned that “operating conditions [are] expected to remain challenging in 2017.”
Standard Chartered still has a lot of work in front of it to get where it needs to be, and with conditions becoming more troubling it may struggle to realise its ambitious recovery plan any time soon. I reckon a prospective P/E ratio of 18.7 times is too high considering the potential for fresh share price pain.
