Dave Lewis warned that there would be no quick turnaround when he got the Tesco (LSE: TSCO) chief executive gig at the backend of 2014. A honeymoon period saw the shares rise to 250p, but the market is ever impatient and they’re currently languishing nearer 150p.
Undervalued on a P/E of 50?
Aside from the high-profile £4.2bn sale of the company’s Homeplus business in Korea, there has been little to make investors sit up and take notice. That goes for news this morning that it is to sell its business in Turkey and Giraffe restaurant chain. The deal in Turkey will produce cash proceeds of around £30m, and a reduction of around £110m in total indebtedness. Big deal, huh?
The thing is, all the fairly low-key things Lewis has been doing — aisle-by-aisle, literally and metaphorically — add up to quite a lot. It’s all about the first principle: “retail is detail”. While a stretched balance sheet and depressed cash flows have been constraints, incremental improvements towards a sustainable business are coming through, if masked somewhat by a challenging, deflationary and uncertain market.
I believe Lewis’s careful husbandry will produce long-term shareholder value. I rate the shares a buy, based on a view that the current price-to-earnings (P/E) ratio of around 50 is meaningless, and that the share price undervalues Tesco’s revenue and margin potential a few years down the line.
Long growth runway
The retail division of £23bn conglomerate Associated British Foods (LSE: ABF) continues to grow at a rate of knots. That division is, of course, Primark. The FTSE 100 group’s other divisions — grocery, ingredients, sugar and agriculture — are valuable and profitable businesses in their own right, but Primark is the turbo engine and currently generates over 60% of ABF’s profit.
Primark’s format is proving as popular in Europe as at home, while the company said in it’s latest results: “Early trading at our two stores in the US has been encouraging, with very positive customer feedback”.
Primark has a long “growth runway”, and for this reason I believe ABF is well worth buying on an admittedly high-looking P/E of 28.5 at share price of 2,910p (20% down from a 3,600p high in December).
Outstanding seven-decade record
Pubs group Fuller, Smith & Turner (LSE FSTA) is another high-quality, thriving business. Again, while the P/E doesn’t exactly scream “cheap” — being 18.4 at a share price of 1,075p — the shares are an attractive buy in my view.
In its annual results, released this morning, the company reported revenue growth of 9%, with pre-tax profit up 12% and earnings per share up 13%. The board also hiked the dividend by 8% and noted: “Our dividend has demonstrated continued progressive growth for over seven decades”.
Despite the results being a bit ahead of analyst consensus expectations, the shares are little-moved in morning trading. Enthusiasm may have been dampened by less impressive numbers for the first 10 weeks of the company’s new financial year, but as the dividend history suggests, this is a company to back for the long-term.