The divestment strategy of Tesco (LSE: TSCO) will likely help management deliver on its promises, but its not the only element to considerwhen it comes to deciding whether Tesco is a value play or not right now.
That said, Id hold on to its shares at their current price of 185p if I were invested.
Tesco Is Cheap
True, the marketplace is challenging, and Tesco stock is still valued at 25 times its forward earnings.If you think thats a lot, however, its also meaningful the discount (26%) at which its shares trade against their 52-week high of 252p in mid-April, particularly considering that ever since Tesco has issued about 30 ordinary updates, including its annual and quarterly results neither of which included nasty surprises.
The food retailer announced today to have agreed to divest its Korean operations, news which was widely expected to push up its stock over 2% in a rising market, at least according to a few analysts I talked to before the market opened.
Tescos Korean assets have been fully valued at over 4bn, but its shares havent budged.
A top-down approach signals that food retailers in the UK are unlikely to be impacted by slightly higher interest rates, while marginally lower rates wont make much difference, either.Even much loweroil prices will unlikely determine a significant rise in their profits indeed, they may render their policy at the pumps less effective. And if oil prices rise, Tesco should be able to pass on that cost to the consumer from these levels.
In this context, Britains largest grocer isnt worse off than any of its major rivals, from Sainsburys to Asda and Morrisons. Its not even fair to say that German discount grocersLidland Aldi will benefit more than their competitors, even though they are growing at a faster pace.
Then, lets look at Tescos key fundamentals.
Theres Appetite For Tescos Assets
As Tesco says in its release today, the proposed sale of Koreas Homeplus to investors led by MBK Partners for acash consideration of 4bnbefore taxes and certain costs disposals will likely yield net proceeds of about 3.4bn will reduce itstotal indebtedness, which is arguably the biggest concern for investors.
Selling assets is never easy when buyers know that divestments are a top priority for the seller, so chief executive Dave Lewis has proved once again that he is doing a great job in managing expectations.This is truly encouraging because additional disposals should not be written off, and they could allow Tesco to keep a lid onits fast-risingpension deficit, too.
Heres the real problem, though: unless Tesco shows that it can grow more profitably, the market will not fully back its management team, who is now faced with critical decisions after a decent stint until March.
Since the end of the first quarter, you’d have greatly outperformed Tesco if you had invested in asmall-cap stock,which is up in the double-digit territory in 2015 and has recorded a +30% performance in less than a month now!
This 400m gem has been identified by our analystsin a recent report, according to whichupside could be much greater than 30% into 2016. Its two-year performance is over 300% …it’s your call, but I advise you to download our report now, combining our research with your knowledge.
The reward could be immense over the long term, so get do not wait any longer and get your FREE copy right now!