At face value there’s plenty to like about Tesco (LSE: TSCO) and its share price right now.
City predictions of strong profits growth (around 10% per annum) through the next couple of years lead to expectations of more chunky dividend hikes. This creates inflation-mashing yields of 3.4% and 3.9%, while at current prices, those earnings forecasts leave it dealing on a forward P/E ratio of just 13.5 times as well.
Tasty figures, sure. But they’re not appetising enough for me to take the plunge, given the mounting pressure on Tesco’s crown at the top of the grocery industry, a point that was again laid bare by freshest Kantar Worldpanel data.
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Competition continues to surge
According to the research house, while Britain’s supermarkets enjoyed a welcome return to growth in the 12 weeks to September (up 0.5% year-on-year), Tesco’s checkouts became that bit quieter. Sales there dropped 1.4% in the period, dragging its overall share of the market 0.5% lower to just below 27%.
Kantar’s latest release underlined the devastation the German discounters are wreaking on the former monopoly of the Big Four grocers. Sales at Aldi rocketed 6.3% in the three months while those at Lidl jumped 9.2%, in turn dragging its market share to record highs of 6%.
The likes of Tesco can expect the bricks-and-mortar disruptors to continue their stunning ascent beyond the near term too. For one, they are likely to continue on their programme of aggressive new store openings and site refurbishments well into the next decade. And in the meantime, worsening economic conditions in the UK look set to drive cost-conscious shoppers through their doors in ever-greater numbers as well.
More Brexit bother
Diving consumer confidence and shopper spending power aren’t the only Brexit-related problem Tesco has to worry about, however. The possible effect of a no-deal withdrawal from the European Union on cross-border trade has been well publicised and the potential impact of this has been laid out by other Kantar Worldpanel figures released in recent weeks.
Apparently, just 50% of all food in Britain is sourced domestically while around a third of the total — including 62% of all fresh food — comes into the UK under current European Union trading arrangements. This means that the likes of Tesco face the prospect of intense currency-related pressure on their already wafer-thin margins, given the likely sinking of sterling in the event of a disorderly Brexit, as well as the prospect of offering up empty shelves as deliveries are held up at ports and new processing and logistics problems rear their heads.
The timing couldn’t be worse for chief executive Dave Lewis to announce that he’ll be standing aside after five years at the helm. No disrespect to his incoming replacement Ken Murphy, a very-capable pair of hands and a previous holder of several high-level posts at Walgreens Boots Alliance, including those of chief commercial officer and executive vice president. But Lewis’s departure adds another layer of uncertainty to the supermarket’s already-worrying outlook.
All things considered, I think Tesco’s a risk too far, despite that decent paper valuation. Over the long run, I reckon it could end up costing share investors a fortune.
