Tesco shares have jumped over 25% from the beginning of the year. Earnings this week will test the idea that the worst of the supermarket price war is behind them after strong Christmas sales.
CEO Dave Lewis’s turnaround plan after eighteen months in the job appears to be gaining some traction. The latest Kantar data released in April showed Tesco’s sales decline slowed for the fourth month in a row. Tesco’s trading update in January showed a surprise turnaround in like-for-like sales over Christmas, though this was tempered with a decline over the third quarter.
Tesco has successfully offloaded a number of “non-core” assets including its South Korea business Homeplus, streaming service Blinkbox and even its corporate jets. The asset sales are all welcome in alleviating Tesco’s debt pile and minimising the need for a rights issue.
Shares have pulled back over 5% from this year’s peak. The risk is that with market share still being lost to discounters Aldi and Lidl as well as “big four” rival Sainsbury’s, the share price momentum peters out. UK grocery sales are increasing at 1.1% year-over-year according to Kantar, but that doesn’t make up for the sector’s 1.5% price deflation.
Successful efforts to cut prices and repair both Tesco’s balance sheet and reputation increase the odds that we’ve seen a bottom in the shares. The question is whether there’s room for any more upside from here or has a good amount of the turnaround effort been priced in.
Tesco share currently trade on 21 times 2017 earnings. The P/E ratio is a little rich compared with expected earnings but very reasonable compared with historical earnings. The trouble is that historical earnings aren’t too likely for a supermarket industry in the middle of a protracted price war.
The three-year price chart shows a failed break to the downside beneath 165p followed by a break above a long-term down trendline as reason for prices to continue to rise. However, 200p has been a significant price pivot that could limit upside near term.