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?
Tescos 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 solidrecovery then it could be justified.
Sell-off
But it seems the institutional investment world is not yet convinced that were at a turning point, with Tescos biggest investor Norways 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 Banks total offloading of Tesco shares to around 125m at todays price.
Meanwhile at Morrison, the forecast picture looks a little less stormy theres 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. Morrisons dividend should be considerably better too, and although it has been slashed this year its 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 Tescos 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.
Morrisons 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.
Well hear soon
We shouldnt have too long to wait until we know how the Christmas shopping period has affected these two companies. Morrisons update should be with us on 12 January, while Tescos is scheduled for a couple of days later, on 14 January.
Im not expecting any dramatic news, but what Ill 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 wont be seeing much in the way of share price recovery until that crucial low point has been passed.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
