The City is always looking forward and there’s constant talk of ‘forecasts’ and ‘expectations’. Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) has had a rough time recently — to put it lightly — so we’re going to take a look at three catalysts that could spark a change in sentiment and remind investors that perhaps the sky isn’t falling after all.
Momentum
The trend has very much been one of sales continuing to decline each quarter. It’s of slightly more concern to some investors because they continue to hear a constant wave of news about how Aldi and Lidl are eating in the discount groceries sector. They have a very small share of the total UK food retail space, but that’s a matter for a different article.
Instead, our focus is on things required to change those bears in to bulls. A reduction in sales that came in ahead of consensus would be a significant moment for everyone. It will cause analysts to stop reconsider their assumptions in their models, and you could probably expect a re-rating of the stock.
Peter Lynch is famous for reminding investors that opportunities for research are all around them, and if you’re anything like me then you’ll have spotted a wave of discounted groceries — that are staple food items — outside your nearest Tesco store. I’ve also noticed TV adverts that are short and sharp: these are the foods, this is how cheap they are, shop at Tesco.
These are making people pay attention, we just have to weigh the chances of these actions feeding through to the results. Discounting hurts margins, but Tesco has famously high margins so they have pretty deep pockets to take a haircut. Is the marketing going to get more people through the doors?
Overseas
Tesco has overseas operations, some of which are more successful than others. They bowed out from a failed Fresh & Easy venture, but when the news was announced the share price reacted positively. It was a loss-making venture and when management took decisive action then the markets rewarded the behavior.
Their European operations are about 15% of total sales, and I believe that, as the Eurozone recovery continues, Tesco is in a good position to benefit from economic prosperity. India, Europe and Thailand are all good markets to be involved with in the long term, but they could use these overseas assets very strategically to send a message to The City:
“No more overseas investment until the UK market has been sorted.”
This would send a powerful message to analysts that they are committed to their home market and intent on sticking to their core competencies. Would they make such a statement?
Management
When Steve Ballmer announced his retirement from Microsoft, the stock jumped 8%. Investors thought the company was 8% more valuable without him. There has been a cry for Philip Clarke to step down, and after the recent announcement Tesco stock rose over 2% on the news. Being replaced by an outsider — Dave Lewis, a Unilever head who turned around one of their operations — is excellent news. He will be keen to prove he’s made of the right stuff.
He starts in October and there will definitely be new management initiatives and a plan of action to be carried out. The proof will certainly be in the pudding, but his track record is excellent.
So there we have it, three catalysts that could turn bears into bulls and see the stock re-rate, the P/E ratio rise from its current low of 11 — sales momentum turning more positive, focus on the UK sector and a management shake-up to deliver better results. In the meantime it will continue to pay you a dividend of over 5%, however!