It’s gone by in a flash and the first-half of 2019 has been largely very kind to the FTSE 100. That’s particularly in the context of the share price washout of late last year when it looked like the world was going to hell in a handcart.
The impact of the US-China trade wars has taken the shine off the Footsie’s ascent more recently but, so far, it remains 16% higher from the sub-7,000-point level recorded at the start of January. One of the strongest performers in this time is Tesco (LSE: TSCO) whose market value has swelled an impressive 22%.
I’m not convinced, however, the supermarket chain can continue its impressive ascent, and fully expect trading to remain rocky for the foreseeable future. In fact, I think Tesco’s share price could turn lower when first-quarter trading numbers are released next month.
Trading turbulence
Most recent financials unpacked in April have certainly made me fear the worst. In its full-year release, Tesco said like-for-like sales in its core UK and Ireland division rose 1.9% in the six months to February, halving from the 3.8% rise printed in the first-half of the fiscal year.
Speculation is rising that the wizard of Tesco’s turnaround, Dave Lewis, is starting to lose his magic. The chief executive may have pulled the battered grocer out of its hole when he took the reins five years ago, but with competition in the marketplace getting ever-worse, this deterioration is to be expected, certainly in my book.
Indeed, Lewis’s battleship isn’t the only one that’s listing again. Mid-tier competitor Morrisons saw like-for-like sales (excluding fuel) rise 2.3% in its own first quarter, stumbling from 3.6% in the same period a year earlier and continuing the sales tailspin from the mid-point of last year.
Meanwhile, like-for-like sales at Sainsbury’s, again excluding petrol, have actually dropped in both of the past two fiscal quarters on which it has already reported, and fell 0.9% in the last three-month period.
Flaky forecasts
So what can Tesco and its mid-tier rivals do to stave off the charge of the disruptors, namely Aldi and Lidl in the budget arena, the likes of Amazon in the online segment and, more recently, the convenience store sector too? Not much, by the looks of it, apart from undertaking further rounds of margin-crushing price discounting.
In my view at least, bubbly City forecasts suggesting Tesco’s earnings will flip 21% higher in the fiscal year to February 2020, look madly optimistic. As a result, the company looks deceptively cheap, carrying a forward P/E ratio of 13.8 times which sits well inside the value benchmark of 15 times and below.
I fully expect earnings estimates for this year and beyond to be chopped sooner rather than later, possibly as soon as next month when fresh quarterlies are released.
My view? Give the retailer a wide berth and go stock hunting elsewhere. There’s no shortage of great FTSE 100 stocks with better investment prospects than Tesco, and ones which look set to pay investors a fortune in dividends too.
