Looking at the one-month share-price chart for Tesco(LSE: TSCO), its tempting to conclude that the shares have reached a period of consolidation an inflexion point.
Inflexion points tend to get us excited because share prices can move rapidly from such formations. The trouble is that they can move fast in either direction, up or down.
Once-proud British corporate leader, Tescos business has hit the skids everyone surely knows that by now. Such a high-profile firm is bound to attract interest as a potential turnaround investment, and investors from Lands End to John O Groats and beyond must be poised over their buy buttons.
Yet, Tesco isnt the best kind of business to choose for a recovery play. Low-margin, high-volume commodity-type businesses like grocery retailing dont lend themselves to spectacularly fast changes of fortune. With such huge revenues and costs, theres great potential for something to go sufficiently badly to wipe out the proportionately small profit Tesco makes on each item it handles.
Theres a lot of risk, and that is why investors watch sales figures so closely, because little fluctuations in the big sales number, or in the firms massive costs, can lead to a large movement in the companys comparatively small profit that seems to be what we are seeing now. What we really need for a turnaround situation is a firm capable of generating big margins once it has itself ship-shape.
A warning from the top
Things are grim at Tesco, and I dont just mean they have been grim, I mean they are grim and they look set to continue being grim. Get that? Grim, past, present and future.
Dont listen to me though, listen to the new Chief Executive, Dave Lewis, who reckons Tescos business is operating in challenging times, and that trading conditions are tough, putting the firms underlying profitability under pressure. He fingers three immediate priorities:
- to recover Tescos competitiveness in the UK;
- to protect and strengthen the firms balance sheet;
- and to begin the long journey back to building trust and transparency in the business and brand.
So, according to Tescos own boss, the firm has no competitive advantage in its largest market, a weak and vulnerable balance sheet, no trust from its customer base and, hitherto, very poor corporate governance.
On a positive note, Mr Lewis also said that Tesco operates from a position of market strength. My goodness, the firms going to need to leverage every last scintilla of that advantage if its to grow again from here.
Tescos fundamental problems seem gargantuan, which is why it wouldnt surprise me if the next move from the share prices current inflexion point were down
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Kevin Godbold 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.