I believe my Motley Fool colleague Royston Wild’s comments on Tuesday were on the money, as he said of Kingfisher (LSE:KGF) that “I think that third-quarter trading numbers scheduled for tomorrow (November 21) could send the firm’s share price sinking yet again.”
In early trading Wednesday the share price shed a further 5%, as the DIY chain owner reported an overall 1.3% fall in like-for-like (LFL) sales in its third quarter.
Perhaps more worryingly, the firm’s flagship B&Q brand in the UK and Ireland saw LFL sales slide by 2.9% and its big Castorama chain in France reported a 7.3% LFL sales fall.
Not all bad
There were a couple of cheery snippets though, with Screwfix doing well — LFL sales in the UK were up 4.1% and Germany provided a 6.4% boost.
As the retail malaise sweeps across Europe, Kingfisher needs to retrench and focus on its core holdings, and it’s taken the bold decision to exit Russia, Spain and Portugal. I think that’s the right thing to do.
Chief executive Véronique Laury did stress that there is “no quick fix” and that appears to have sent investors rushing for the exits, but I see reasons why shares in this enigmatic company could be attractive.
Cash looks fine
One is that Kingfisher does not appear to have any cash or liquidity problems, and it is continuing with its £600m capital return plan. On the same day as the update, the firm announced a further £50m share buyback, so it apparently sees its own shares as undervalued now.
The valuation also suggests to me that all of the bad news and more could already be factored into the share price. Dividends are forecast to yield 4.5% to 5% and would be more than twice covered by earnings. I expect there will be more bumps along the way, but I think Kingfisher could be a contrarian buy.
Tasty forecasts
Where Kingfisher is mired in uncertainty, that does not seem to be the case at Tesco (LSE: TSCO) these days, with analysts predicting double-digit EPS growth this year and next. They also see dividend yields rising as high as 3.6% by February 2020.
But I can’t help thinking that this apparent lack of doubt might be misplaced, and where depressed shares like Kingfisher’s are often pushed down too low, recovering shares in popular brands can easily be lifted too high by over-enthusiasm.
Tesco shares are currently trading on a forward P/E of around 14.5, but I see evidence of emotional attachment to the UK high street favourite in the path its share price has followed this year. At its peak in August, we were looking at a P/E as high as 19, though we’ve since seen the shares fall by 15%. And the past five years have been characterised by these false-start ups and downs.
Competition
Fellow Fool writer Kevin Godbold has suggested that a lack of differentiation from its competitors in a market characterised by increasing competition makes Tesco’s “growth options limited.” I agree, and I fear any cutback in today’s rosy forecasts could hit the share price further.
The current share price valuation looks about fair on the face of it, but I see the groceries market as an increasingly tightly squeezed one — and I just don’t see how Tesco has any edge any more.
