Friday tips round-up: Tesco, Unilever
Let’s play a game, ‘name that company’. It made £112m of pre-tax profit at the half stage of the year on £34bn of revenue. On top of that, sales have been on the decline everywhere over the last 18 months. Who done it? You guessed it, Tesco. More importantly, to put it simply, price charts can be misleading. So despite the sharp falls in the stock price buyers should beware. In fact, the current share price, at 174p, is roughly discounting earnings per share of 15.8p, if one takes into account that Tesco has historically traded at a price-to-earnings multiple of 11.
That estimate from markets does not seem unreasonably low. How did its competitors react on the day of the results? Just as one might expect, with intense advertising. Making matters worse, the company’s new chief executive has spent his first seven weeks at the office tied up dealing with an accounting scandal. "No need to rush into the shares just yet," writes the Financial Times’ Lex column.
Global consumer products manufacturer Unilever saw third quarter underlying sales rise by 2.1%, instead of the 3.7% expected by analysts. Given the company’s €50bn in annual turnover that adds up to a whole lot of unsold Knorr cubes and Dove body wash. Just as important, it was the weakest showing by the firm since the end of 2009 and revealed further weakness in emerging markets. Also to take note of, Unilever was the first consumer giant to warn of a slowdown in emerging markets a year ago.
Not surprisingly, the Americas were strong, with a 6.8% rise despite cut-price promotions. European sales were hit by deflation and poor summer weather and China saw widespread de-stocking by distributors. The latter should unwind by the end of the year and after a 20% drop in sales. Yes, the company believes it can continue to outperform markets which are growing at just 2% annually. However, approaching 20 times earnings there is not much left to go for, says The Times’s Tempus.