A figure of 0.1% may not be much, but for Tesco (LSE: TSCO) an increase in year-on-year sales by this amount was an incredibly important symbol for the struggling grocer. It likely doesn’t portend a return to the good old days of consistent profits and dividends, but it could the beginning of the end of several years of misery for shareholders.
More important for Tesco than this increase in overall sales was a slight bump in underlying operating margins, which in the UK rose from 1.1% to 1.2% year-on-year. This is far below the 5% margins Tesco regularly enjoyed only a few years ago, but it’s a step in the right direction. Unfortunately, I see little way for margins to return to this previous level thanks to the well-documented price wars brought on by no-frills and online-only competitors.
Furthermore, shares already trade at a pricey 20.9 times forward earnings, suggesting high amounts of growth are already priced-in. With few prospects for top-line growth, greatly reduced pricing power and £5.1bn in net debt on the books, I’ll still be steering clear of shares.
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Long-term winner
Despite posting a 2% decline in revenue, consumer goods giant Unilever (LSE: ULVR) shares ended the week in the green. This was because the disappointing top-line performance was down to the strong euro relative to emerging market currencies, where Unilever brings in most of its sales. And, despite weakening emerging market economies, underlying sales increased 8.3% in developing markets and 4.7% overall.
This strong underlying growth despite a poor macroeconomic environment shows the strength of Unilever’s brand name goods. These brand names led to enviable core operating margins of 14.8% that should continue to improve as the company rolls out new cost-cutting measures in the months ahead. The bad news for investors thinking about buying shares is that the market prizes Unilever’s resilient business model and shares are priced at a full 22.5 times forward earnings. However, this quarter shows that Unilever can deliver to shareholders through thick and thin, which combined with a solid 3% yielding dividend is an attractive combination for long-term investors.
Power player
Last week’s results at BGEO Group (LSE: BGEO), the holding company for Bank of Georgia, blew the Tesco and Unilever figures out of the water. Revenue jumped up a full 38% as deposits increased 43% and the loan book expanded 20% at the bank. Unlike the UK’s largest banks, Bank of Georgia has been posting steadily growing profits for several years now thanks to return-on-equity of 21.7%, which is leaps and bounds ahead of the likes of Barclays or even Lloyds.
Of course, investing in a Georgian bank’s holding company with investments ranging from healthcare to renewable energy isn’t without its risks. Despite this, I believe BGEO has higher potential growth than either of Tesco or Unilever. The banking arm continues to grow its relatively low-risk retail business while maintaining low costs and a healthy capital buffer. The smaller investment arm has also done well, with profits increasing 81% over the past year. Altogether, an efficiently run business, high growth prospects, 3.6 % yielding dividend and low 7.6 forward P/E ratio make BGEO an appealing option to me.
