Tesco (LSE: TSCO) just goes from bad to worse, doesnt it?
I mean, one bad Christmas doesnt mean the UKs biggest supermarket has lost its way, does it? Well, its looking like it did, with Tesco still not having managed to turn things round in the last couple of years. And theres clearly worse to come, with no sign of a return to profit growth on the cards before the year to February 2017 at the earliest.
Buy when things look bad
But when things look like they cant get any worse they do!
On 29 August, Tesco released a profit warning and chopped its dividend by a swingeing 75%! Ive said before that I expected a cut, but I didnt imagine anything that bad. And to top it off, major investor Harris Associates, which held 3% of Tesco, has slashed its holding amid fears that new boss Dave Lewiss strategy is too uncertain but least Mr Lewis, fresh from the top job at Unilevers Personal Care division, has now joined the company a month earlier than planned.
And the share price slumped again, and now stands at just 228p. But has it gone too far?
Heres a quick look at Tesco lined up against J Sainsbury (LSE: SBRY) and Wm Morrison (LSE: MRW), assuming that the 75% dividend reduction will be maintained through to 2016:
| Year | Tesco | Sainsbury | Morrison |
|---|---|---|---|
| EPS growth 2014 | -5% | +6% | -8% |
| P/E |
10.4 | 9.6 | 9.5 |
| Dividend Yield |
4.4% | 5.5% | 5.4% |
| Dividend Cover |
2.17x | 1.90x | 1.94x |
| EPS growth 2015* |
-27% | -7% | -53% |
| P/E |
11.0 | 10.3 | 14.9 |
| Dividend Yield |
1.4% | 5.4% | 7.4% |
| Dividend Cover |
6.5x | 1.80x | 0.91x |
| EPS growth 2016* | -3% | -1% | +17% |
| P/E |
11.5 | 10.5 | 12.7 |
| Dividend Yield |
1.3% | 5.4% | 6.4% |
| Dividend Cover |
6.47x | 1.78x | 1.22x |
* forecast
On that score, Im happy to rule out Morrisons as a contender right away. So its down to Tesco vs Sainsburys.
One down
And although Sainsburys looks like a pretty good investment, the question is whether Tesco shares are oversold now has the nations top food retailer finally hit the point of maximum pessimism?
I think it probably has (though Ive thought that several times before), and I reckon there are some compelling reasons to buy as a recovery play now albeit one not without risk. Tesco still has almost 30% of the UKs groceries market, and it commands a 45% share of the online market. (Thats what you get by being first eat your heart out, Morrisons.)
Tesco also has the clout, boosted by all that cash that it isnt now going to pay out as dividends, to slash prices, dump ex-chief Philip Clarkes initiatives, or whatever Dave Lewis thinks is the right thing to do.
Safe or adventurous?
So, for a safe supermarket investment, Id go with Sainsburys but I really cant help thinking Tesco is finally at the too cheap to ignore level.
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Alan Oscroft 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.
