Why Forecasters Got It So Wrong For Tesco PLC

tesco2We often rely on analysts’ forecast when trying to decide what shares to buy, but they got it badly wrong — and continued to get it wrong — for Tesco (LSE: TSCO).

Anyone not foreseeing the Christmas crunch in 2011 can surely be forgiven, but as recently as just a year ago the City boys were still getting it badly wrong! In fact, the consensus 12 months ago for Tesco was for revenue of £68bn in the current year, and since then that’s been downgraded to £62bn.

Forecasts continually cut

Not too bad a mistake, perhaps, but look how far out they were on earnings per share (EPS). A year ago, they were predicting 33.2p per share for this year, and that’s nowhere near to coming true. The most recent consensus has slashed that EPS prediction to just 17.2p — that’s a cut of 48%.

Dividend forecasts since a year ago have been slashed by nearly two thirds, from an earlier estimate of 15.5p per share to just 5.2p, so why has it been so difficult to get anywhere near the likely truth?

Well, the deep underlying problems for Tesco have been surprisingly slow to be spotted, with most observers just seeing it as a great company going through a bad patch and likely to get back on track before long. And they missed what’s looking increasingly likely — that the ascendent days of premium-priced supermarkets are in the past, and there’s been a no-return seismic shift to the good old Lidl sell it cheap approach.

There’s a new era upon us of lower-margin supermarket shopping, and the only way to survive in it is to cut those prices — and very few of us had really fully grocked that.

Tesco didn’t spot it

And you know who the last to fully appreciate the change was? That’s right, Tesco itself, and as reality has been striking home it’s been issuing profit warnings. We had one in August when the company lowered its full-year profit guidance from £2.8bn to £2.4bn, and that was followed in September by the shock news that first-half profits had been overstated by around £250m.

Analysts tend to follow company guidance, especially for big companies like Tesco, and there are few who would want to rock the boat by going against the tide. And historically they’ve had good justification — back in 2010, before the rot set in, the City was forecasting EPS of around 33p and 37p for the years ending February 2011 and 2012 respectively, and Tesco went on to beat those guesses.

Are they right now?

The big question now, with Tesco shares down 52% over the past 12 months to 176p and on a forward P/E of just 10, is have analysts finally got it right and will their prognostications some day again prove to be too conservative? It’s got to happen. Hasn’t it?

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.