After a dismal 2014,Tesco(LSE: TSCO) has got off to a great start this year. The companys shares have jumped a staggering 22% year to date.
And this performance haspushed Tesco to the top of 2015s FTSE 100 leader board. Only Randgold Resources has managed to rack up a stronger performance over the past month.
The demand for Tescos shares over the past few weeks has been driven by a strong belief that the companys turnaround plan will return the group to growth. However, Tescos market-leading performancedoes not mean that the company is out of the woods just yet.
Indeed, the companys underlying business performancehas, based on the limited information available, failed to improve significantly over the past 30 days.
Tesco has undergone a complete overhaul during the past few months and its easy to see why the market is impressed with the companys actions.
Key to this turnaround has been the replacement of the old management team.New chief executive Dave Lewis was parachuted in and he has not wasted any time implementing much needed reforms. Additionally, a replacement chairman, when finally appointed, should bring more new ideas to the table.
Dave Lewis has been instrumental in driving Tesco to cut the unwanted fat from the companys bloated corporate structure. The new CEO has already cutthe number of the retailers most senior managersby a third and further management changes are planned.
Furthermore, Tescos head office in Cheshunt, Hertfordshire is being closed along with 43 existing stores. A further 49store developments are also being scrapped and the company is reducing the number of items stocked in stores by a third.
Overall, the company is hoping to save 250m per annum by making these cuts now rather than later. And there are also plans for Tesco to sell off some of its assets.
Specifically, Tesco has appointed bankers to oversee the sale ofDunnhumby, the retailers data analysis arm.Dunnhumby could fetch 1bn to 2bn, helping Tesco to pay off debt and reduce interest costs.
No evidence yet
But while these plans sound impressive, as of yet theres little to suggest that Tescos turnaround is starting to work. Whats more, its unlikely that well know whether or not Tescos plan to turn around its fortunes is really starting to work for at least 12months. These changes need time to filter through the company.
With this in mind, Tescos does look to be overvalued at present levels. Indeed, the company currently trades at a forward P/E of 20.7 and earnings per share are expected to fall 65% this year. Growth of just 2% is forecast for 2016 andgrowth of 23%is expected for 2017. On that basis, Tesco is trading at a 2017 P/E of 16.2, which does seem expensive
So overall, based on Tescos current valuation it seems as if the groups share price has risen too far too fast. Whats more, now the company has slashed its dividend payout, income investors have been left high and dry.
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