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The Stocks of Warren Buffett: Tesco Corp.

January 13, 2012 | About:
Josh Zachariah

Josh Zachariah

37 followers
The British grocer-retailer, Tesco (TSCDY) seems to fit many of the features Buffett looks for in a stock. The stock is trading at an attractive price to earnings of just under 11. The company has grown profits and revenues throughout the recession. Sales have grown 31% from the period 2008 to 2011, but profits had grown even faster at 35%. These figures were more impressive than Walmart’s (WMT) which had grown 11% and 29% respectively. The company averaged a return on equity over 15% for the past 10 years and has held a profit margin of around 4% during the period and 4.4% this past year. Contrast these margins with US grocery stores such as Kroger, Safeway and Supervalu which have averaged profit margins closer to 1% over the same period. These chains are not the juggernauts they used to be as Walmart has elbowed its way into the US grocery market taking some 30% market share in the process.

It is not surprising then that Buffett expressed his concern when Tesco decided to enter the competitive US market with the Fresh and Easy brand stores. Though these are a much more organic-themed grocer, the chain would still be competing with giants such as Costco (COST) and Walmart. The Fresh and Easy store is a unique concept in that it is exclusively self-checkout, but the chain has yet to see the kind of turnover it needs to become a profitable entity for Tesco.

But beyond its small foray into the US Tesco sits in an enviable position on top of the British grocery market. Tesco holds the greatest market share at 30% followed by Wal-Mart-owned Asda with 16.9% and then Sainsbury’s (16.3%) and Morrisons (12.3%). Collectively these grocers account for 76% of the Tesco grocery market. This kind of market power lends itself to excellent economics (for shareholders) and sometimes as was the case recently, incidents of impropriety.

In 2007 the leading British grocers were accused by the Office of Fair Trading of conspiring to control dairy prices. Asda, Sainsbury and Safeway all confessed to the crimes, but Tesco (the largest) denies any agreement to fix prices. Whether or not the allegations ring true the company certainly would’ve been a beneficiary one way or another to the other grocers’ actions. If the grocers raised prices Tesco would’ve captured a higher asset turnover with its lower prices. If Tesco followed suit they too will have yielded higher profit margins.

In either case the British grocery oligopoly remains and Tesco’s healthy profit margins will likely continue into the future. With food prices being elevated as they are now and farming such a profitable trade we could even expect higher profit margins in the future if farmers start churning out bumper crops and consequently driving food prices down for the grocers. These favorable long-term economics are probably just some of the reasons why Buffett counts Tesco as one of his few international stocks.

About the author:

Josh Zachariah
I credit my father and Warren Buffett for molding me into the investor I am today.

Rating: 3.0/5 (42 votes)

Comments

jhodges72
Jhodges72 - 2 years ago
Good article.
vgm
Vgm - 2 years ago
Nice article. Thanks.

Just to add that very recently on CNBC Buffett stated that he would happily buy more TSCO if the price dropped back a bit.

Charlie Munger made the quip that "in the UK, Tesco is god almighty!". Munger is of course a huge Costco fan.
GED
GED - 2 years ago
1. Safeway is not owned by Kroger. Both are publically traded stocks on NYSE (SWY and KR)

2. You obviously have never been in a Fresh and Easy store, or you wouldn't have described them as upscale and organic themed...

A simple search on Google would have provided you with the correct info of Safeway, Kroger, and Fresh and Easy.
Josh Zachariah
Josh Zachariah - 2 years ago
Thanks for pointing that out. Somewhere I had read Safeway had some kind of association with Kroger and thought it was owned by them.
jonmonsea
Jonmonsea premium member - 2 years ago
and then of course their non US international operations should be able to grow nicely over time
Liarspoker
Liarspoker - 2 years ago
Just to point out that Buffett owns Tesco PLC ( TSCO.L ) not Tesco Corp ( NASDAQ:TESO ) which is what the header implies.

Edit: Quick post. ;O)
jhodges72
Jhodges72 - 2 years ago
It's "implies" not "applies".
alleygator
Alleygator - 2 years ago
What's the difference between the two, LP?
superguru
Superguru - 2 years ago
Article header and Ticker in article has a mistake as Liarspoker pointed out.

NASDAQ:TESO -

Tesco Corporation (TESCO) is engaged in the designing, manufacturing and service delivery of technology-based solutions for the upstream energy industry. (from google)

mpmassey
Mpmassey - 2 years ago
How does Gurufocus vet authors and their articles before it allows them to be posted on their site? This is so chocked full of errors it appears the author was doing it for kicks. It is not reliable information which means it is meaningless to readers here.
Josh Zachariah
Josh Zachariah - 2 years ago
Hey guys,

When I submitted the article Gurufocus it automatically interpreted Tesco as the American company and assigned that ticker. There are the ADRs of Tesco (ticker: TSCDY) which gurufocus offers financials on and of course there are London domiciled shares.

Mpmassey, what other errors did you notice on the article? I admit I did squeeze the article out on December 24th when I was reading about Tesco, but the figures are all accurate. Tesco's market share did dip over the holidays to just under 30%, but the financials are all plucked from gurufocus.

Thanks for you guys comments,

Josh

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