2014 was a tumultuous year for Tesco (LSE: TSCO), and one the retailer would rather forget.
Indeed, falling sales, an accounting scandal and a management shake-up all hit the company hard. At one point, the group’s shares had collapsed by more than 50% from the high of 330p per share, reported at the beginning of the year.
However, over the past six months Tesco’s shares have rebounded. Year to date, Tesco is up 16%. At one point during the past three months, the group’s shares had racked up an impressive year to date gain of 30%.
But after recent gains, have investors missed the chance to buy Tesco?
Strong gains
Tesco’s gains this year have been driven by the company’s restructuring rhetoric. Over the past six months, there has been plenty of talk about the company’s plans to cut costs, lower prices in stores and sell off non-core assets.
Management has made some progress on this front. It’s believed that the company is in the process of cutting 6,000 jobs from its headquarters and the 43 stores that it has decided to close. These cuts are part of CEO Dave Lewis’ plan to cut costs by around £250m per annum.
Nevertheless, as of yet, these actions by management have not started to show through in Tesco’s earnings. And City analysts don’t expect management’s turnaround strategy to have an effect on earnings until 2017.
Falling earnings
After reporting a near record-breaking pre-tax loss of £6.4bn for last year, analysts expect Tesco to report a pre-tax profit of £980m for this year.
On a per share basis, excluding exceptional items like Tesco’s property writedown, group earnings per share are set to fall 1% this year. What’s more, according to City figures, Tesco is currently trading at a forward P/E of 24.4, a high valuation that leaves little room for error.
With this being the case, it does look as if Tesco’s gains over the past few months have been overdone. Further, after the recent dividend cut Tesco’s dividend yield stands at a disappointing 0.4%.
Too late
Tesco’s recovery already seems to be priced into the company’s shares at this price, which is concerning. The group still has plenty of work to do before it returns to growth, and the discounters are still stealing market share from the retailer.
Tesco’s market share fell by two-tenths of a percentage point to 28.4% during the first three months of this year. During the same period, Aldi and Lidl’s sales rose 16.8% and 12.1% respectively, taking their market shares to 5.3% and 3.7%.
Still, analysts expect Tesco’s earnings to return to growth during 2017. Figures currently suggest that Tesco’s earnings per share will jump by as much as a third to 12.1p during 2017. With this figure in mind, the company is trading at a 2017 P/E of 18.5.
But with two years of uncertainty head before Tesco publishes its full-year results for 2017, I’m sceptical about these figures.
A better bet
All in all, it looks as if investors have missed the perfect opportunity to buy Tesco. The company’s shares now look expensive, and there’s plenty of uncertainty ahead.