Tesco shares end 2015 with reality check

‘Every little helps’ is Tesco’s long-running tagline, though the group might like to switch it to ‘every silver lining has a cloud’ on Wednesday.

All Britain’s biggest and most controversial supermarket had to do was release 2015 results which would, in all probability, be acceptable to the market after a disastrous performance in the year before.

Tesco did do that, and in fact a little better.

Its closely watched operating profit was £944m in 2015/16, comfortably above CEO Dave Lewis’s cautious expectation of at least £940m, and slightly better than the core result still discernible within the mire of Tesco’s 2014/15 near-implosion.

Furthermore, the group confirmed it had seen the first real-terms quarterly retail sales growth for almost three years, with a 0.9% rise in comparable stores in Q4.

Other tallies showed modest-to-fair progress too.

• Group sales: £48.4bn; +0.1%
• Statutory operating profit: £1.046bn  (£5.75bn)
• Retail operating cash flow: £2.6bn; +39%
• Net debt: £5.1bn; -40%

Despite all these wins, Tesco shares still traded as much as 5% lower.

We think once the ‘hard data’ had turned out satisfactory, investors naturally homed in on the softer opinion-laden comments around outlook.

Reading these, they would be hard-pressed to discover anything materially new.

Still, it looks like well-worn descriptions of the supermarket operating environment as “challenging, deflationary and uncertain” were not particularly wanted.

Comments to reporters in which CEO Lewis stressed that profit improvement “won’t be a smooth line” also tipped the shares over.

Combined with Tesco and rivals’ determined pursuit of discounters downmarket—price reductions “on thousands of products” still a core priority—it was enough to bring the over-optimistic back to earth.

Elsewhere, Lewis appeared to be expressly referring to obscure legislative proposals in Hungary when he reminded that the group continued “to be cautious about potential legislative changes in our European markets”.

But it might not be much of a stretch to take that comment also as a cover-all nod to what we would assume to be a negative outcome, from Tesco’s point of view, if the verdict from June’s Referendum on EU membership was ‘No’.

Either way, the risk needs to be added to the sector’s long-standing concerns and helps put the retreat by Tesco shares on Wednesday morning into better context.

Note that even taking into account ‘recovery skew’, Tesco’s forward price/EPS, currently running a little above 23 times (says Thomson Reuters) looks charged with optimism against a previous 19.5 five-year high.

Updating our ‘stake-out’ chart published overnight, we find that our suspicion that the long-term descending trend would strike again was realised.

Support we have been watching close to 186p has held though, but momentum trends—see stochastic sub-chart—are nominally unfavourable; at least for those who aren’t interested in divergent price action, though of course divergence can’t be ruled out in the near term.

Our base case remains that the price could fail moderately at looming triangulation from the falling diagonal and current support, with a test of nearby trends (yellow 50-day MA, dark-blue 200-day MA) set to continue in the near term.

If correct, the view reduces the chances that stronger support below the 100-day MA (lilac) would be required, with 150p an even more distant prospect.

Either way, a break above the falling trend that has been the stock’s bugbear since September 2013 is the only way it can progress on the upside.

DAILY CHART

Please click image to enlarge