Today, I am looking at Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), and deciding whether to place it in my stocks trolley.
Difficulties endure but turnaround plan well underway
Tesco’s interims in June revealed the heavy work the retailer still has to carry out to get earnings back moving in the right direction. Total sales in Britain, excluding petrol, rose just 1% in the April-June period, while on a like-for-like basis revenues actually fell 0.9%.
The company blamed the poor performance on the restructuring of its general merchandise strategy, in addition to what it describes as a “disproportionate exposure to consumer electronics”. Tesco has also suffered from rising competition at home as a whole host of competitors, from higher-tier grocers such as Waitrose through to budget outlets like Lidl, have muscled in Tesco’s territory.
But I am convinced the firm’s ‘Build a Better Tesco’ drive should transform the firm’s fortunes, although this could admittedly take time to reap rich rewards. The grocer’s steps to boost its price competiveness and resuscitate its reputation for offering good food — especially after the horsemeat scandal earlier this year — are steadily gathering pace
Meanwhile, its multi-channel approach is continuing to show signs of promise, illustrated by a steadily improving online business. And its international operations are still making good progress, even if local issues in Asia have affected growth in its overseas markets more recently.
A delicious deal for patient pickers
My belief that Tesco could be set for further near-term earnings pressure is borne out by City forecasters, who expect last year’s 11% decline to be followed by a 9% fall, to 32.8p, in the year ending February 2014. But as I have said, the supermarket provides an appealing investment case for the more patient investor, and earnings are expected to snap back from next year onwards — a 5% advance to around 34.3p is forecast.
The company has announced plans to grow dividends “broadly in line with underlying earnings”, which seems to run against broker forecasts of a rise to 15.14p this year. Although this lacks appeal to dividend investors when viewed in the medium-term — indeed, the firm kept the total payout on hold at 14.76p in 2012 — I expect the firm to deliver increasingly appetising dividends as its turnaround story gains traction.
Supermarket ready to deliver plenty of value
Shares in Tesco have recovered strongly from June’s six-and-a-half-month nadir of 326p, having jumped 14% to current levels around 370p. And the retailer’s price-to-earnings (P/E) ratio just above the value benchmark of 10, at 11.3, suggests that further gains could be in the offing as the stock provides decent value for money. This looks even better when compared with an average prospective P/E reading of 16.1 for the entire FTSE 100.
In my opinion, Tesco’s transformation strategy should start delivering stellar results from next year onwards. But if you are less convinced, and and looking to significantly boost your investment returns elsewhere then check out this special Fool report, which outlines the steps you might wish to take in order to become a market millionaire.
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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco.
