MIDAS SHARE TIPS: Don’t shop for quick profit in Tesco shares

As Tesco so famously tells us, every little bit and the store’s haunted shareholders were hoping for at least a crumb of solace from yesterday’s half-year results.

The grocer tried to look on the bright side, with strong like-for-like sales and the largest full-year profit forecast. The top of this guideline — which gives analysts an idea of ​​what to expect when it next reports — was trimmed modestly, pushing the stock to its six-year low.

Like other retailers, Tesco faces a long shopping list of problems, most of which are not of its own making. The cost of food is rising, and CEO Ken Murphy says Tesco customers are “watching every penny” to make ends meet.

That means changing customer behaviour, such as smaller shopping carts, more own brand stores and a Christmas that is more like Bob Cratchit’s than the traditional Bacchanal feast.

Tesco must adapt to this without losing market share to discounters like Aldi and Lidl, which could lead to tighter margins and lower profits. For example, it costs almost as much to supply two smaller stores as one larger one, so while customers are cautious, Tesco’s costs are rising.

There is also a lot of uncertainty on the horizon, something the stock market absolutely hates. Murphy acknowledged that it is “too early to predict how customers will adapt” to ongoing price inflation. “Significant uncertainties still exist in the external environment, particularly how consumer behavior continues to evolve,” he warned.

But while Tesco shares are in the bargain, there are still reasons to be merry, including a 20 percent increase in the interim dividend. Goldman Sachs analysts described the performance as “mixed,” with comparable sales exceeding expectations, although profit margins were below expectations.

Bernstein’s William Woods is pleased with the company’s new strategic framework focusing on value, club card, convenience and finding £1 billion in cost savings over three years. The company also returns cash to shareholders through a buyback.

Woods described the plan as “a considered but potentially prudent framework, which we believe is appropriate given the challenges facing the industry.”

Clive Black, at Shore Capital, has a Hold rating for the stock, despite its strong first half performance and the company’s high level of free cash flow and assets.

He says he is nervous about inflation and what he calls the ‘totally inept and incompetent British government’ driving up borrowing costs.

“What the future holds for Tesco’s revenues remains to be seen, but there is a lot of uncertainty,” he warns.

MIDAS VERDICT: It’s hard not to feel sorry for Tesco’s Ken Murphy, who does everything right. The rise in food inflation, problems with gold yields and the crisis in the cost of living cannot be blamed on him, but his shareholders are reaping the consequences.

Tesco’s shares have underperformed the broader supermarket market in recent months and we can expect further weakness in the near term as the issues affecting the business are not likely to go away anytime soon.

On the plus side, though, the company has a lot of money, good supplier relationships, and real expertise in providing value to customers when needed, so this is a storm it’s likely to weather.

Trading at a P/E ratio of less than ten times, with a dividend yield of 5 percent, Tesco’s expertise will likely pay off in the long run, but it’s only a bargain for those who can wait.

Traded on: Main market ticker: TSCO Contact: 01992 632222 or tesco.com