From the mailbag, Paul writes:
“I have to ask David, what are your thoughts on Tesco? Lost 1/3rd of market cap in a short time and now a forward yield of 6%. It is still a market leader and surely makes enough cash to turn the decline around, though admittedly it is a but like turning an oil tanker. Whilst I don’t live in the UK at present, I was visiting recently and I specifically made a point of visiting Aldi, which I thought was terrible. Surely once wage inflation picks up, then people will revert back to a shop where they can actually do a single shop rather than being so price conscious.
In June of this year I wrote a post called ‘Why Tesco Is Still Not A Buy‘
At the time I wrote:
At today’s share price of 296p, Tesco’s PE Ratio is 24…that makes Tesco stock too expensive to make an investment in.
It’s share price really needs to decline a lot further before it becomes a true bargain.
How much further?
Well all else being equal it’s 2003 lows of 162p a share would be nice.
Tesco Price Chart Up To June 2014
I also wrote:
It’s clear from the chart that the share price support (ooh a technical analysis term) at 3oop and reached a low of 280p on 11 April 2014.
A close below 280p could be what the market needs to really dump this stock.
If that occurs it may not necessarily go to 162p but would clearly be a bargain if it did.
At the time Philip Clarke, Chief Executive stated that:
We expect this acceleration to continue to impact our headline performance throughout the coming quarters and for trading conditions to remain challenging for the UK grocery market as a whole.
These short term observations have played out and continue to do so with the Tesco share price down from 280p to 248p and its PE ratio down from 24 to 20 as of yesterday’s close.
We have since heard that Tesco have appointed a new CFO and that Philip Clarke is to replaced as CEO by Dave Lewis on 1 October 2014 an appointment that has been cheered by The City due to Lewis’ aggressive approach to sales and marketing.
But the fact remains that Tesco’s sales are still in decline and so is it’s market share, registering it’s lowest market growth for a decade according to Kantor Worldpanel:
- Tesco’s sales fell 3.8 percent year on year in the 12 weeks ending July 20, with its market share dipping to 28.9 percent from 30.3 percent
- The fall was worse than the 1.9 percent decline Kantar data showed for Tesco sales in the 12 weeks to June 22 last month
- In July 2014 Tesco issued its second profit warning in two years, saying sales in the first half of the year were “somewhat below expectations”
- Kantar said, British consumers shop around for cut price deals to save money and waste less by buying little and often in local convenience stores or online
- Tesco and Morrisons are also being particularly hurt by the rise of the German hard discounters Aldi and Lidl
- Sales at Aldi rose 32.2 percent in the period taking its market share to 4.8 percent, almost in line with more upmarket Waitrose
The next set of interims from Tesco are due 1 October 2014 at which point some in The City have argued that Tesco should cut it’s dividend currently at 5.95%, higher than Sainsbury (5.6%), Marks & Spencer (4.0%) and Walmart (2.6%) but lower than WM Morrisons (7.4%).
As an old school bargain basement value investor I do not factor the dividend yield or whether or not a cut is required because I place much more emphasis on analysing the operating business, it’s management, it’s market share, revenue, assets, earnings per share and finally it’s margin of safety which is calculated by obtaining an intrinsic value from the analysis of it’s operating business in the first instance.
If it’s good enough for Buffett (who is a current shareholder of Tesco) then it’s good enough for me.
So What Is The Intrinsic Value Of Tesco?
Turning around an oil tanker takes time and is dependant on weather conditions, load, skill and judgement.
Tesco is still turning, treacherous weather conditions being at least one factor that is prolonging its turnaround.
But what is Tesco’s intrinsic worth?
But that’s just in it’s current state.
If Lewis were to stop the hemorraging and get Tesco in a position where customers are actually choosing it over Aldi and Lidl then the intrinsic value is higher.
But fortune-telling is the antithesis of a value-orientated approach.
Hence in today’s market with today’s consumer habits even with it’s brand name, purchasing power, distribution channels and the like Tesco is worth 300p.
- A 30% margin of safety would be a share price of 200p
- A 50% margin of safety would be a share price of 150p
It is interesting to note that there is considerable price support (ooh another technical analysis term) around 150p at 50% margin of safety.
In any event the dividend yield – at least from the SharesandStockMarkets.com perspective – can chop up and down all it likes because unless the business itself is operating on a firm footing, it’ll make little difference to investors who’d like to see Tesco regain the hearts and minds of it’s former customers.
Disclosure: I do not have plans to initiate a position in regard to stocks mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.