This is surely going to be a critical Christmas and New Year for Tesco (LSE: TSCO) and Wm Morrison Supermarkets (LSE: MRW), but could it finally signal the turnaround that the two of them need?
Tesco’s current year, ending in February 2016, is still forecast to show a further 45% fall in earnings per share (EPS), putting the 151p shares on a P/E of 29 — and forecasts for the year after for a 78% EPS rise would drop that to around 16. That still looks a bit challenging compared to the FTSE 100 long-term average of nearer 14, but if it does reflect the start of a solid recovery then it could be justified.
Sell-off
But it seems the institutional investment world is not yet convinced that we’re at a turning point, with Tesco’s biggest investor — Norway’s Government Pension Fund Global (operated by Norges Bank Investment Management) — having dumped 27 million shares a week ago to take its stake below 6%. That takes Norge Bank’s total offloading of Tesco shares to around £125m at today’s price.
Meanwhile at Morrison, the forecast picture looks a little less stormy — there’s a 16% EPS drop forecast for the year ending January 2016, followed by a 22% recovery the year after, giving us forward P/E multiples of 17 and 14 respectively as the shares change hands at 153p. Morrison’s dividend should be considerably better too, and although it has been slashed this year it’s still set to yield 3.5%, followed by 3.8% next year — but those high yields are partly due to a 41% price fall over the past two years, compared to Tesco’s 55% fall.
At the halfway stage reported in October, Tesco boss Dave Lewis spoke of “an unprecedented level of change“, “sustained improvement“, and “accelerated growth and reduced operating expenses“. UK like-for-like sales did, however, fall by a further 1.1%, with intense price competition forcing pre-exceptional operating profit down 55%. At best, it sounded to me as if sales falls might be finally bottoming, but the ongoing price wars with the likes of Lidl and Aldi could still cause pain for some time to come.
Morrison’s third-quarter update was also less than sparkling, with like-for-like sales (excluding fuel) down 2.6% in the period, and chief executive David Potts spoke of “…moving at pace on the long journey towards improving the shopping trip for customers“, which probably reflects about the right level of optimism.
We’ll hear soon
We shouldn’t have too long to wait until we know how the Christmas shopping period has affected these two companies. Morrison’s update should be with us on 12 January, while Tesco’s is scheduled for a couple of days later, on 14 January.
I’m not expecting any dramatic news, but what I’ll be looking for is any sign that the deflationary effects of price-warring might be slowing down or perhaps even coming to an end — because we surely won’t be seeing much in the way of share price recovery until that crucial low point has been passed.