Its unwise to follow blindly buy or sell recommendations from City analysts in isolation.
However, these recommendations fromprofessional analysts, who havegreatermarket expertise and specific knowledge about the companies they follow, can be highly insightful and forma great starting point for further research.
One company that the Citys top analysts just cant seem to agree on isTesco(LSE: TSCO).Price targets vary from 169p to 295p, and its difficult to decide which group of analysts has put together the mostconvincingargument for the company.
Bear case
Analysts at investment bank Credit Suisse believe that Tescos shares are worth no more than 169p. They make the case that the groups UK operations are loss-making and barring an aggressive restructuring, it will take some time for Tescos UK stores to return to profit.
Whats more, analysts at Credit Suisse are concerned about Tescos ability to return cash to investors.
However, it is interesting to note that before Tesco issued its profit warning last year, Credit Suisse was one of the companys most vocal supporters. During 2013 the banks analysts stated that,We think growth/capital discipline can co-exist andTescos exceptionally strong shareholder returns over the last 20 years have beenoverlooked, butgrowth remains engrainedin company culture. As weve since found out, this turned out to be a misleading statement.
And after misleading investors two years ago, its easy to take Credit Suisses view on Tesco with a pinch of salt.
Bull case
At the other end of the spectrum, HSBCs analysts believe that Tescos shares could be worth as much as 295p. HSBC believes that the companys outlook has improved notably under new CEO Dave Lewis.
Even though Lewis has only been in the role for a few months, he is already winning over the City. Tescos sales have shown signs of strength recently, and the retailer has stopped losing market share. Also, HSBC notes that discounters Aldi and Lidls sales and market share growth is slowing from its year ago peak.
Moreover, HSBCs analysts have picked out three key advantages Tescos has over almost all of its peers.
Firstly, Tesco has a buying power advantage over its peers, in other words, the retailer can achieve better margins than peers due to its bulk buying from suppliers. HSBC believes that for every 1bn in sales,all else being equal, Tesco can pocket an additional 0.3% profit compared to a smaller peer likeSainsburys.
The second advantage Tesco has over its smaller peers is economies of scale. HSBCs analysts believe that if Tesco were to increase spending on advertising, for example, Sainsburys would have to spend almost twice as much as a percentage of sales to achieve the same reach and impact on consumers. The same goes for other fixed costs.
The third and final factor is again to do with size, specifically the size of Tescos distribution network. HSBCs analysts believe that Tescos network of distribution centres, stores, employees, warehouses and lorry fleet, the company has an unrivalled logistical advantage over almost all of its competitors.
The bottom line
All in all, HSBC seems to present the most convincing argument and for that reason Im inclined to support their price target of 295p for Tescos shares.
However, you should always do your ownresearch before making a trading decision — you may come to a different conclusion.
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Rupert Hargreaves owns shares of Tesco. The Motley Fool UK has recommended shares in HSBC and 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.