Stock of the day 05/10/2015 – Tesco PLC

Will Tesco’s half year results on Wednesday be a supermarket sweep, or will it leave the stock in the reduced aisle?

Looking back at January and Tesco couldn’t have started the year in a better way; after opening at £1.77 the stock jumped 15% on January 8th followed the announcement that the company would be closing 43 unprofitable UK stores in the midst of restructuring that also included £250 million in cuts and a 30% reduction of its overheads. Tesco managed to hit £2.42 with its post-statement growth, before settling into a much more lateral strand of trading within a £2.35 to £2.45 bracket across February and most of March.

By the start of April Tesco had managed to reach a 7 (and a bit) month high of £2.52; however, its statement at the end of the month was soon to spoil the party. On 22nd April Tesco announced the worst results in its history as a company, revealing a £6.4 billion full year pre-tax loss for the 12 months to February, the biggest ever suffered by a UK retailer. Whilst the majority of that was related to £4.7 billion in property writedowns, alongside the fact that (as CEO Dave Lewis was keen to stress) sales improved in the second half of that year, the stock understandably took a sharp tumble, falling to £2.20 by the start of May.


(Source: IT-Finance.com 05/10/2015)

A brief rally to £2.33 in the aftermath of the Tory’s UK election victory was short-lived, and a dismal run of trading across May and the start of June soon left Tesco teetering on the edge of the £2 mark for the first time since its January jump. In the run up to its June report Tesco did manage to creep away from those lows to spike to £2.23; however, despite a slowing sales decline for the 3 months to May, falling 1.3% compared to the 4% drop year on year, investors weren’t impressed, sending the stock back to £2 by the start of July.

The stock soon rebounded, spending the end of July and the start of August loitering around £2.20, before the China-inspired market turmoil of the latter month sent it all the way to £1.88. News at the start of September that it had sold its South Korean business Homeplus for £4.2 billion did nothing to improve its image with investors, leading to a 9 month low of £1.65. News that Sainsbury’s is expecting slightly better than forecast full year profits helped lift the sector as a whole, and leaves Tesco at a current trading price of £1.85 (IT-Finance.com, 05/10/2015).

In terms of its half year figures on Wednesday, analysts are expecting a 58% fall in operating profits to £385 million alongside a 1% fall in sales, an improvement on the 4.6% drop seen the previous year, and flat revenue of £30.3 billion. Tesco is also likely to announce a full year outlook that is slightly better than the £548 million currently forecast, whilst investors will be on the lookout for news of progress on the sale of its data arm Dunnhumby after a deal with WPP stalled.

Tesco has a consensus rating of ‘Hold’ with an average target price of £2.19.