Is Tesco PLC’s Recovery Falling Apart?

 Is Tesco PLC’s (LON: TSCO) recovery stalling?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tesco’s (LSE: TSCO) recovery could be stalling. Indeed, after a good start to the year, there’s been little in the way of good news released by the company during the past six months. 

According to data research firm Kantar Worldpanel, Tesco’s sales are still falling. Management’s plan to sell off non-core assets seems to be falling apart, and Tesco’s share price has fallen back to the lows printed at the end of last year. During the past six months, Tesco’s shares have fallen 29%, underperforming the wider FTSE 100 by 15.7% excluding dividends. 

Asset sales stalling

Part of Tesco’s plan to rebuild its balance sheet and return to growth is to sell off non-core assets. Assets on the chopping block included its Homeplus Korean unit, central and eastern European operations and data analysis business, Dunnhumby. 

Homeplus has already been sold for a consideration of more than £4bn, but Tesco is pulling the sale of Dunnhumby. Analysts had expected the sale of Dunnhumby to bring in up to £2bn for the company. 

So, it now looks as if Dunnhumby will remain part of the Tesco empire for the time being. However, Tesco’s central and eastern European operations, which are also up for sale, have been valued at nearly £2bn. These operations contribute almost £6.5bn of group sales. 

If the company manages to offload its European operations, it should reduce group debt and equivalents from £20.5bn to £15.5bn, ten times new CEO Dave Lewis’s £1.4bn profit target for this year. 

Sales under pressure

Moving on from balance sheet concerns, Tesco’s sales are still under pressure as the discounters continue to eat away at the retailer’s market share. 

According to the latest figures from Kantar Worldpanel, Tesco’s market share is at its lowest level for almost a decade. During the 12 weeks to 13 September, group sales declined by 1% year-on-year.

That said, sales at Tesco’s Express convenience stores actually grew during the period studied, although the growth was not enough to offset declines across the rest of its store portfolio. 

City concerns 

As Tesco’s sales continue to decline, City analysts are revising down their estimates for the company’s earnings almost every day. For example, this time last year analysts expected the company to report earnings per share of 19p for full-year 2016.

Now, the latest figures from the City suggest that Tesco will report earnings per share of 7p for 2016. Further, during October of last year, analysts were expecting Tesco to report earnings per share of 20p for full-year 2017.  Estimates have since fallen by around 50% to 11p per share. 

Based on these figures Tesco is trading at a forward P/E of 24, a high multiple more suited to a high-growth tech company rather than a struggling retailer. City figures suggest Tesco is trading at a 2017 P/E of 15.1. 

 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »