Saturday, 22 December 2012

Xmas trading play in Tesco?

Is Tesco a Christmas trading candidate?

December 22, 2012

I was looking at the Retail sector this morning, and noticed that Tesco has been moving higher since  mid-October, and is now within spitting distance of its 350p year high. 

Should it break this high, there is a good chance it will move up to close the gap opened up in January at 385p, when it issued a profit warning (its first in 20 years). The new CEO Phil Clarke has been in position for some time now, so has had time to make some fundamental changes to get the UK's number 1 supermarket chain back on track.

Here is an excerpt from The Guardian on December 5:
"The failure of the US operation, after investment of more than £1bn, also cost the retailer's deputy chief executive, Tim Mason (below), his job. Mason, who masterminded the US business from the opening of the first Fresh & Easy store near Los Angeles five years ago, had spent 30 years with the grocer and is expected to walk away with a total payoff of about £5.7m.
Tesco chief executive Philip Clarke has called in investment bankers to advise on what to do with the Fresh & Easy chain, which has 200 stores. However, he admitted Tesco was most likely to "exit" the business, which it had once hoped to build into a huge chain that could take on Walmart."

Here we spot a catalyst for the share price in the form of stemming the losses from the US, with the potential to see Tesco finally start to catch up with its UK rivals after putting in place an important investment plan, which should be completed in 18 months.
So share price momentum is good, we see a potential catalyst in view, and valuation remains attractive at a forward PE (based on Feb 2013 EPS) of just over 10x and a dividend yield of well over 4%. 

A key point to remember with Tesco: it has continuously raised the annual dividends paid every year for the past 10 years, and so is a FTSE 100 "dividend aristocrat" - there are not so many of those, and Tesco is one of the cheapest right now. I will keep a close eye on TSCO, and add to my existing position if it breaks through 350p to the upside in the near future...

Disclaimer: I already own TSCO shares.

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