Supermarket juggernaut Tesco Plc (UK: TSCO, US: TSCDY) will release its preliminary results for the year ending 28th, February, 2011 on the 19th of April, 2011.
Recently news headlines have been screaming about the large downturn in the UK retail sector. Obviously the cold winter was to blame as well as consumer caution due to the current rough and tumble economy. However, it appears that the headlines screamed much too loud. March is always an interesting time for investors as many companies release their preliminary results for the year ending 31st, December.
Many retail companies released their full year results last month and many of those results exceeded analyst expectations. However food prices dropped by 1.4%, in the UK, in March and some analysts have pencilled in zero growth for like-for-like sales in Q4 as non-food items acted as a drag. International growth should be good however with South Korea leading this growth. Progress on the Eastern European Hypermarkets should be reported as well.
Tesco is approaching the end of its five year plan to raise GBP 5bn from property sales. Analysts now speculate that Tesco will re-embark on another property disposal plan which could, potentially, fund a share buy-back scheme.
With that in mind we can look at current forecasts for Tesco. First of all note that earnings growth has recently been increased from 1% to 2%.
Consensus forecasts for 2011 are:
Revenue of GBP 61.58bn
PTP of GBP 3.534bn
EPS of 32.37p
Dividend of 14.42p which yields 3.54% at the current price of 407p.
Looking forward the current consensus forecasts for the year till 29th February, 2012 are:
Revenue of GBP 66.26bn
PTP of GBP 3.936bn
EPS of 35.92p
Dividend of 15.76p which yields 3.87% at the current price of 407p.
Placing those earnings on the average multiple for the last five years, 15.14 (let’s just say 15), then we get a rough share price of 485p for the 2011 figures and a price of 539p for the 2012 figures.
Given that many investors on GuruFocus are long term investors it pays to have a look at Ben Graham’s value formula.
This formula is: Value = current normal earnings times the sum of 8.5 plus 2G
Where G equals the expected growth rate over the next seven to ten years.
So for each Tesco share we would calculate:
35.92 X ( 8.5 + ( 2 X 5 )) = 54.42
Note that the growth rate is only 5%. This figure is conservative if you look at Tesco’s past earnings growth. Over the last five years Tesco has grown earnings by 12.8% per annum.
Perhaps a 5% growth rate is too low but with higher inflation as well as interest rates earning growth should slow somewhat over the next decade.
Placing the value per share on the appropriate multiplier, again using a conservative figure, of 13.5 we calculate a share price of 735p. Obviously this does not include earnings paid out as dividends.
Currently I see fair value of Tesco shares at around the 600p mark, taking into account earnings over the next few years, and therefore have followed Ben Graham’s rule of accumulating shares at less than two thirds of this value ( i.e. 400p ).
Tuesday’s results are the first set of results under Philip Clarke Tesco’s new CEO and all eyes should also be looking at Tesco Bank which is forecast to have increased operating profits by 12%. Fresh & Easy, the groups US operation, is expected to remain in the red.
Disclosure: I hold Tesco stock
I am a partner at ShareLadder.com where we spread the value ethos laid down by Ben Graham and Warren Buffett. I am very lucky, in that, not only is share picking my hobby but I am also able to pursue my hobby permanently by choice.
Recently news headlines have been screaming about the large downturn in the UK retail sector. Obviously the cold winter was to blame as well as consumer caution due to the current rough and tumble economy. However, it appears that the headlines screamed much too loud. March is always an interesting time for investors as many companies release their preliminary results for the year ending 31st, December.
Many retail companies released their full year results last month and many of those results exceeded analyst expectations. However food prices dropped by 1.4%, in the UK, in March and some analysts have pencilled in zero growth for like-for-like sales in Q4 as non-food items acted as a drag. International growth should be good however with South Korea leading this growth. Progress on the Eastern European Hypermarkets should be reported as well.
Tesco is approaching the end of its five year plan to raise GBP 5bn from property sales. Analysts now speculate that Tesco will re-embark on another property disposal plan which could, potentially, fund a share buy-back scheme.
With that in mind we can look at current forecasts for Tesco. First of all note that earnings growth has recently been increased from 1% to 2%.
Consensus forecasts for 2011 are:
Revenue of GBP 61.58bn
PTP of GBP 3.534bn
EPS of 32.37p
Dividend of 14.42p which yields 3.54% at the current price of 407p.
Looking forward the current consensus forecasts for the year till 29th February, 2012 are:
Revenue of GBP 66.26bn
PTP of GBP 3.936bn
EPS of 35.92p
Dividend of 15.76p which yields 3.87% at the current price of 407p.
Placing those earnings on the average multiple for the last five years, 15.14 (let’s just say 15), then we get a rough share price of 485p for the 2011 figures and a price of 539p for the 2012 figures.
Given that many investors on GuruFocus are long term investors it pays to have a look at Ben Graham’s value formula.
This formula is: Value = current normal earnings times the sum of 8.5 plus 2G
Where G equals the expected growth rate over the next seven to ten years.
So for each Tesco share we would calculate:
35.92 X ( 8.5 + ( 2 X 5 )) = 54.42
Note that the growth rate is only 5%. This figure is conservative if you look at Tesco’s past earnings growth. Over the last five years Tesco has grown earnings by 12.8% per annum.
Perhaps a 5% growth rate is too low but with higher inflation as well as interest rates earning growth should slow somewhat over the next decade.
Placing the value per share on the appropriate multiplier, again using a conservative figure, of 13.5 we calculate a share price of 735p. Obviously this does not include earnings paid out as dividends.
Currently I see fair value of Tesco shares at around the 600p mark, taking into account earnings over the next few years, and therefore have followed Ben Graham’s rule of accumulating shares at less than two thirds of this value ( i.e. 400p ).
Tuesday’s results are the first set of results under Philip Clarke Tesco’s new CEO and all eyes should also be looking at Tesco Bank which is forecast to have increased operating profits by 12%. Fresh & Easy, the groups US operation, is expected to remain in the red.
Disclosure: I hold Tesco stock
I am a partner at ShareLadder.com where we spread the value ethos laid down by Ben Graham and Warren Buffett. I am very lucky, in that, not only is share picking my hobby but I am also able to pursue my hobby permanently by choice.
