Broker verdict: Tesco

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Written by: Cherry Reynard
09/12/2014

Another day, another profits warning from Tesco. We ask brokers for their verdict on the beleaguered retailer.

Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers

“The trading update may be brief and patchy on detail, but it has provided more ammunition for the snipers.

If there had been hope that the market would be immune to yet another profit warning, this quickly evaporated as Tesco has provided profit guidance which is nearly 30% shy of an already lowered estimate. The company partially attributed the lower figure to increased investment in the business, but amidst the accounting mishap, the revolving door in the boardroom and an unforgiving attack from the discount retailers, investors have simply lost interest in waiting for a recovery story which still seems some way off.

Even prior to today, and as a result of the uncertainty, the share price had taken a battering, having fallen 44% over the last year, as compared to a 2% hike for the wider FTSE100, and down 36% in the last six months alone. Unfortunately, there remains only one constant amid the turbulence, which is the market consensus. This remains rooted at a sell and seems likely to remain so.”
Mike van Dulken, Head of Research at Accendo Markets

“Stop! Unidentified item in the bagging areas! While it’s slogan may be ‘every little helps’, Tesco’s decision to take the rule-of-three a step further with another profits warning is no laughing matter or more satisfying/effective for loyal and battered shareholders. While new CEO Dave Lewis and his team may be taking all the right steps to restore confidence in the UK’s biggest grocer by market share after its accounting troubles of late and trying to keep the continually gaining cut-price competition at bay, the short-term impacts on profitability are being punished mercilessly with the shares trading -15% at 155p support levels dating back to 1999-2000 and 2003. Could this be where the real bargaining hunting begins, or is there too much risk still in the basket and a revisit of <150p on the cards?”

Darren Shirley, analyst, Shore Capital

“Tesco has issued a surprise update today, in which it states that Trading Profit for the year ended Feb 2015 will be no more that £1.4bn. We had forecast £1.88bn (consensus £1.94bn) so this represents a further significant downgrade. Indeed, our initial analysis suggests the guidance implies the UK will be loss making through H2 2015 to the tune of £200m, and deliver EPS of c11-12p. The shortfall is attributed to a combination of in store investment and a new commercial approach with suppliers. We reiterate our HOLD recommendation for now.”

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