Why Are Forecasts Still Falling At Tesco PLC, J Sainsbury plc And WM Morrison Supermarkets PLC?

Tesco (LSE: TSCO) shares are on the up, having gained 44% since mid-December to 236p, so is all finally well again?

Not really. At least not if you take a look at analysts’ forecasts. The thing is, while the share price has been recovering, forecasts for earnings and dividends for this year and next have been falling. Three months ago the consensus for February 2016 suggested earnings per share (EPS) of 12p, but that’s been steadily declining to today’s consensus of 10.7p — and the most recent recommendations have set share targets of less than the current price!

The cut in the dividend forecast is no surprise after Tesco told us it is not going to pay a final dividend this year, but other snippets from the January trading update must be partly behind the downgrades.

More battles

While new boss Dave Lewis is highly respected, he was talking more about “a better shopping experience” than offering much in the way of concrete prognostications, and spoke of a future of “very difficult changes to make“. Presumably the true scale of the battle Tesco has to face against the deep-discounting Lidls and Aldis of the world is genuinely striking home at last?

And it’s not just Tesco, as were seeing forecasts pared back at Sainsbury’s (LSE: SBRY) and Morrisons (LSE: MRW) too, again in the face of rising share prices.

At Sainsbury’s, we’ve seen EPS forecasts for the year to March 2015 cut from 26p to 25.5p over the past three months, though over the final quarter we shouldn’t really expect surprises. But for 2016 we’ve seen the prediction cut back from 22.8p per share to 22p, for a bigger drop. At 261p the shares are priced on a P/E of 12 for 2016, which doesn’t seem too bad — but has the price competition really hit Sainsbury’s yet?

The inevitable faced?

The shake-up at Morrisons, in the form of a new boss and the inevitable dividend cut, added a bit of support to the recent share price rise — Morrisons is up 33% since the end of October to 198p. But again EPS forecasts for January 2016 have been scaled back, from 13.8p three months ago to 11.8p. Like the other two, it’s been a mirror opposite of the share price rise over the same timescale.

Still, at least for Morrisons the City pundits think the worst is over and are predicting EPS rises this year and next, and hopefully the dividend will not need to be cut further.

Not over

But at least in the short to medium term, I’m not convinced these share price recoveries are yet justified — we could easily have a few years of cut-throat pricing to come before things settle.

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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.