Tesco (TSCDY, Financial) used to be one of the strongest blue chips you could own. Even Berkshire Hathaway’s (BRK.A)(BRK.B) Geico division owned shares for many years. Tesco’s problems started when Aldi and Lytle came into Great Britain and other markets. These low-priced grocers are tough to compete with, and Tesco witnessed revenues and earnings fall. The U.K. is saturated with grocery stores.
There are 8.14 billion shares, and the market cap is £15.1 billion ($21.8 billion). Sales were £48.4 billion ($70.18 billion) in FY 2016, down 1.6% from 2015. Profit was £944 million ($1.368 billion) and was about flat year over year. After exceptional items, profit was £102 million ($146 million), up from a loss of £6.69 billion ($9.7 billion). Diluted earnings per share were 2 euro cents, up from losses of 69.56 euro cents. Total revenue including fuel sales was £54.433 billion ($78.9 billion). It takes $1.45 to buy one pound.
Capex was cut from £1.8 billion to £1 billion in the current year. Net debt was also reduced from £8.5 billion to £5.1 billion. On the balance sheet, cash is £6.545 billion and £1.6 billion in accounts receivable. Accounts payable were £8.568 billion and debt £2.8 billion. You can see that management knows it must rein in the spending. The debt was recently upgraded by Fitch.
The dividend was cut a few years ago. If management is smart, they will continue to prune divisions, build cash and pay down debt. They have been doing this but I’d like to see the old dividend reinstated. At the current stock price and old dividend, the stock would yield 6%. If that happens, I’d be a buyer. The stock has done well lately but Credit Suisse is bearish and has a target price of £1.35, far below its current price of £1.85. I use the stock price in London, not the American ADRs. The ADRs trade at $8.07. As you can see, the ADR is three shares combined plus the value of the British pound to the U.S. dollar.
Tesco was able to sell its Homeplus division in Korea in 2015. The sale provided £4 billion ($5.8 billion) in cash before taxes and greatly reduced debt. This was a smart move. It recently announced that it would sell half its stake in Lazada, an Asian online retailer. The sale should bring in £90 million. There are also a few other divisions on the auction block, including Dobbies Garden, which ought to bring in a few pounds.
Tesco is classic sum-of-the-parts valuation. The company is selling off divisions and paying down debt. I wouldn’t buy shares as they have run up lately and there is no dividend. If management reinstated the dividend, I might be interested. Tesco is also the classic example of why it’s so difficult to invest in grocers, retailers and restaurants. Someone has a dream, it’s hot for several decades, the founder grows old, and someone new comes along and replaces them. How many retailers, restaurants and grocery stores remain from the 1960s where you live? Probably not many. I’d say hold off on Tesco.
