Tesco - spilt milk in aisle 17

Tesco: So Tesco’s have dropped another pallet of baked beans, to a resounding crashing noise. The statement is full of fine words and intentions but the bottom line is a stark warning that group trading profit for FY 2015 will not now exceed £1.4bn. This is against £3.3bn last year (FY 2014) and already sharply reduced latest expectations of £1.8bn to £2.2bn. When they refer to new policies and procedures for their commercial income activities, I would assume that the P&L is now being made more transparent, but that means the entire toolbox (both good and bad) of profit smoothing has been junked. The recent hooha at Premier Foods over their recent over-bearing supplier contracts only adds to the momentum towards greater contract clarity and fairness throughout the supply chain. Reference is also made by Tesco “to invest in and improve our customer offer”, which must imply more price cuts and a further margin squeeze. But investors are not yet able to look to brighter days ahead. On 8^th January, Tesco will provide more details about improving the “competitiveness of the UK customer offer and to strengthen the balance sheet”. The former probably means yet more margin pressure and the latter a mix of cost cutting, capex constraints, further dividend pressure and maybe even fresh equity.

All this woe means that forecasts are more uncertain than ever. For what it is worth, if the operating profit reaches £1.4bn (but that is tops), it would be down 57%. If eps followed the same path they would be 13.5p-ish. At 170p that is a PE of 12.6x, with a very cloudy dividend outlook. If these were trough earnings then you could look to the stock as a recovery play. Sadly though, the 13.5p still feels flaky and the best course of action could well be to wait for the 8^th January. Remember also that, with Tesco’s sharpening the price offer, the likes of Sainsbury’s, Asda and Morrison’s profit line should be feeling the pain as well. Meantime, the special offers in various supermarkets over the next 15 days could be the real excitement (Neil Cumming^, 9^th December 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower