Tip Update Tesco PLC (uk:TSCO)
Growth
Medium RISK
Our previous tip
- We said Buy
- When 07/01/2011
- Price 432p
- Tip performance to date -24%
When you've been at the top of your game for as long as
UK like-for-like sales, excluding VAT and petrol, slumped 2.3 per cent in the six weeks to 7 January 2012. That's not only way below analyst's expectations - the consensus was for a 0.9 per cent decline - but it also marks a sharp deterioration in trading since Tesco reported a 0.9 per cent fall in like-for-like sales in the third quarter to end November 2011. And it comes despite weak comparatives; trading in the same period of 2010/11 was adversely affected by the severe bad weather in the UK.
Tesco also warned of 'minimal' trading profit growth in the next financial year. Trading profit for the full year to end-February 2012 is now likely to be at the bottom of analyst forecasts, although on an adjusted basis EPS is likely to be in line with the consensus. Ahead of today's trading update, analysts at Charles Stanley were forecasting EPS of around 35.4p in the full financial year.
But it is the damage to next year's earnings which has really spooked investors. In fact, with trading profit now expected to be flat, this equates to a hefty 10 per cent earnings downgrade for the year to February 2013.
The fact that the trading environment has been tough for all food retailers hardly comes as a surprise as consumer spending remains under severe pressure. But it's clear is that Tesco's promotional activity has not succeeded in driving volumes higher to compensate for this price deflation. In the circumstances, it is hardly surprising that investors have headed for the exits, sending the shares to their largest one-day decline in over 20 years.
■ See also Short-lived respite for retail
SHARE TIP UPDATE:
There is still a lot to like about Tesco. In addition to its UK dominance, it offers exposure to emerging market growth and a business incorporating financial services and a fast-growing online presence. However, these positives have not been enough to compensate for the tough trading envronment in the UK, and with EPS set to be flat in 2012/13 financial year, the shares have lost the growth element investors were happy to pay for in the past. Trading on 9.5 times underlying earnings and yielding 4.4 per cent, we are bailing out of our buy tip (432p, 7 January 2011) and now rate the shares a hold at 330p.
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