Why Amazon Will Not Kill This Business

Tesco is a great example of how one should be very careful judging a company’s fundamental performance by looking solely at the performance of its stock.

The company reported another great quarter with a lot of “increases”: total sales increased 4.3%; same stores increased 0.9%; store traffic increased (it has been increasing for many quarters now); employee morale increased; operating margin increased from 1.8% to 2.3%. According to management, Tesco is on track to achieve a 3.5-4% operating margin in 2019-2020. (We think that ultimately Tesco will be able to get to 4.5-5% margins – at its peak in 2009 Tesco commanded a margin of 6.2%). The company’s debt is down from 3.7 billion to 1.9 billion pounds.

Tesco is a showcase of what can happen when you take a great asset and marry it with an awesome management team. Tesco’s current team (headed by Dave Lewis) has done an incredible job returning this grocer closer to its glory days.

Our earnings estimate for 2020 is around 25-31 pence. (At its peak in 2012 Tesco earned 36 pence per share.) At the current price of 174 pence, Tesco is trading at 6-7 times our earnings estimates. (Note that the price you see on your statement is for American Depositary Receipt shares for symbol TSCDY, in US dollars).

It is very easy to look at Tesco and be bored by this stock. It has not gone anywhere for years. Tesco used to be the bluest of the blue chips in the UK – its CEO was even knighted by the queen. Tesco still has a 28% market share in the UK, with sales pushing $80 billion. It is almost double the size of its largest competitor, which gives it significant buying power and lower distribution and overall costs – very important in a retail business. The new management has been returning the company to what it used to be before it lost its way trying to conquer the world and before it was attacked by German discounters Aldi and Lidl.

Tesco’s fundamentals (the performance of its business) and its stock price tell very different stories. As long as the business continues its positive trajectory (which we believe it will), the stock price will start to reflect fundamentals. 

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Vitaliy Katsenelson

I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”

I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).

And if you prefer listening, audio versions of my articles are published weekly at investor.fm.

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