Theshares of Tesco (LSE: TSCO)trade around the level they first recorded at the end of 1997 and for most of 1998. Here are the main differences between now and then and here is why Tesco stock could plunge to 100p.
Tesco 1998 vs Tesco 2015
In 1998, Tesco reported revenue of 17.7bn. Thats about one fourth of the turnover that Tesco is expected to report in 2015. The growth rate for revenue stood at 18.7% year on year. The food retail market was booming in those days, and Tesco had all it needed to strengthen its leadership ahead of Sainsburys.
Operating profit came in at 912m: it grew roughly in line with revenue, and was less than half the operating profit that Tesco is expected to report next year. In 1998, Tescos operating profit margin was about 1.5 percentage points above the level that Tesco is expected toreport in 2015.
Between 1994 and 1998, Tescos market share grew from 10.7% to15.2%. Tesco was smaller, better managed and more profitable. It also exploited favourable trends for the retail sector, which have continued for about 20 years until the departure of Terry Leahy.
Earnings And Price Target
In 1998, fully diluted earnings per share came in at 26.6p. They rose by 13.2% year on year. Thats in stark contrast with Tescos performance these days.
Not only is Tesco not growing right now, but its forward earnings per shares are expected to come in some 30% below the level they hit in 1998. The 1998 dividend stood at 11.6p: it was 80% higher than the dividend that Tesco is expected to pay next year.
A 45% discount to Tescos current stock price of 180p isnt too aggressive under a base-case scenario, in my view. Although Tescos assets base indicates a fair value of between 200p and 250p a share, its stock price could easily drop to 100p, particularly if no-frills supermarkets continue to steal market share in the UK.
Divestment Premium: What Premium?
Tesco is big enough to fail. It owns valuable assets that will become less valuable as time goers by, in my view unless, that is, radical action is taken.
According to several press reports, Tescos assets in Asia may fetch a valuation of 9bn, but such a price tag would imply a sales multiple of 0.85x, which is highly unlikely in this market. The shares of Tesco trade at roughly 0.3x sales.
There is no reason why any buyer would pay up for assets being held by a company that needs to raise cash at a time it struggles in its core markets. And there is no reason why Tesco could not bounce back, of course but if you are on the hunt for value, you may well choose investments that offer much higher returns and lower risk in the current environment.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
