Tesco: bargain hunters beware
Even after halving, the shares do not look cheap
So how bad are things at Tesco? Take your pick of Thursday’s awful figures. The table on page 11 of the first-half results, showing that like for like sales have been falling everywhere for the past 18 months, would be one place to start. The pre-tax profit of £112m on sales of £34bn would be another. The £527m of one-off items, only part of which are related to the accounting problems, are a third. The whole ugly story is summarised in the share price: it has halved versus a year ago. This is no start-up, remember. Tesco is a supposedly defensive food retailer.
At 174p, the shares are pricing in continued awfulness. Over the past five years, Tesco shares have traded at an average price to forward earnings of 11, according to S&P Capital IQ. Apply that to the current share price, and implied earnings per share are 15.8p. Last year the company made underlying EPS of 32p. With 7.7p reported for the first half of this year and like for like sales still falling, there is no reason to think that the 15.8p is unreasonably low. The shares, then, are not cheap, whatever the price chart might suggest.
Making that price look like a good entry point will require some heroic action on the part of newly arrived chief executive Dave Lewis. Rivals can sense weakness and are ready to take advantage – Aldi, Lidl, Asda, Morrison and Sainsbury were all advertising heavily on Thursday. The last thing Mr Lewis needed was to spend the first seven weeks of his tenure clearing up the accounting mess.
The broad outline of what he needs to do is clear. First he needs to overhaul pricing and product ranges. With the UK trading margin already having more than halved to 2.34 per cent, that will be painful. Which leads to point two – cut costs. That applies to both operating costs and capital spending (so no more new hypermarkets). And he will also have to repair the balance sheet. New equity would help, as would the sale of some of the more peripheral UK and overseas businesses. That will all take time. No need to rush in yet.