Tesco shares are moving higher after a leading analyst said the supermarket’s recovery was on track, and the share price weakness presented a good buying opportunity.
Bruno Monteyne at Bernstein Research said:
Tesco’s communication style has been much more about telling investors what they have done in the period preceding results rather than telling investors what they are doing at all times; but the small snippets of information we have received (pension, trading results, pricing analysis), show that Tesco is making real improvements at a very rapid pace. We would expect Tesco to give its own update at the Interim results on 7 October; with the overall message that everything is going well.
[At the interims] we would expect an overwhelmingly positive message of trading improvements and the first half UK margin is expected to be 80-90 basis points better than the second half of 2014, showing the start of the v-shaped recovery. Beyond this, there is still likely to be further trading improvements (either from inflation coming back or Tesco improving market share), news on disposals, the final acceptance of the pension offer, further changes to the ClubCard and news of partners taking up excess space; all of which will support our bull thesis.
Moneyne is keeping his outperform rating with a price target of 285p, saying:
Tesco’s new chief executive [Dave Lewis] has already delivered much more much faster than any of us would have expected the day he started (1 September). The despair and excessive pessimism from November last year disappeared when Tesco delivered an all-mighty come back during Christmas despite having 8 senior executives suspended during an investigation for accounting irregularities. The discussion now rightly is about ‘how high can long term margins be in the UK’, ‘how long will it take’ and ‘what are the odds of success’. With opinion on the ‘value’ of Tesco still very polarised – there is no true ‘consensus view’ – and the lack of solid new data points makes this stock very susceptible to sentiment. Hence the recent de-rating of the stock. Even if the daily flood of news reports on ‘lower than expected disposal valuation for asset A, B or C’ were ALL true, none of them would move the needle on Tesco as much as a proper, rapid and solid UK recovery. Our End of Term report shows very solid execution on that UK turnaround plan, therefore the recent sell-off provides a good re-entry point into the Tesco value case, with some catalysts on the horizon.
Tesco’s shares are currently up 4.3p or nearly 2% at 219.7p.
