Can things get any worse for Tesco (LSE: TSCO)? Its Chief Executive and Finance Director have both resigned this year, during the course of which its share price has fallen by a whopping 27%. Indeed, Tesco seems to be treading water until the arrival of Dave Lewis in October, with its share price continuing to slide in the meantime. However, this could be the perfect time to buy shares in Tesco and, more importantly, its share price could rise by 30% over the medium term. Here’s why.
A New Strategy
It’s always difficult to replace a hugely successful Chief Executive who has been at a company, public or private, for a considerable amount of time. That was the task faced by Tesco when Sir Terry Leahy stood down in in 2010 after fourteen highly successful years at the helm. The question is, do you try and ensure a smooth transition through appointing an internal replacement in an attempt to continue the work done by the predecessor? Or, do you bring in an external candidate and give him/her the license to make their own mark through a new strategy that could cause some short term pain, but may be good for the business in the long run?
Tesco went the first route, and it has shown. Certainly, Philip Clarke is a highly competent and skilled individual, but he has been unable to fully make his mark on the business as Chief Executive. In other words, he hasn’t really made the job his own and has lived in Sir Terry Leahy’s shadow to a large extent. This has meant that Tesco’s strategy has been somewhat one-dimensional in terms of scaling back operations abroad and focusing on price in the UK — neither of which have proved to be particularly successful strategies.
Unlike Philip Clarke, Dave Lewis will have licence to implement his own strategy based on what is best for Tesco now, not what was best for it under Sir Terry Leahy. As a result, the market should expect Tesco to become leaner, more focused, more international and, subsequently, more profitable.
Looking Ahead
The results of a strategy change are, of course, unpredictable. However, it is safe to assume that the market will be much warmer to the new strategy than it has been to the old one. Indeed, shares in Tesco have been derated massively over the last few years, with them currently trading on a price to earnings (P/E) ratio of just 9.9. With the FTSE 100 having a P/E of 13.3, an improvement in sentiment to the same level as the FTSE 100 (which is entirely possible over the medium term), would mean that shares in Tesco trade at over 320p. That would represent a gain of 30% from current price levels, just from a rerating.
Indeed, Dave Lewis has a lot to do when he starts on 1 October. He will, however, have the scope to implement his own strategy, which will be a huge step forward for the company and could mark the start of significantly warmer sentiment from investors.