Tesco plc isn’t the only retailer I’d sell straight away

Royston Wild explains why Tesco plc (LON: TSCO) isn’t the only high-risk retailer he’d sell today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The intensifying fragmentation of the British supermarket sector has prompted me to take a cautious stance on Tesco (LSE: TSCO) and the so-called Big Four operators for a long time now.

Aldi and Lidl have famously changed the game, their emergence into the mainstream more than a decade ago showing shoppers strained by the 2008/09 financial crisis that they could load up their baskets for less without necessarily having to compromise on quality.

These chains remain dedicated to expanding at a breakneck pace to keep customers flocking from Tesco, which once claimed £1 out of every £7 spent in the UK back in its heyday.

Just this month Lidl announced that it was creating 700 new jobs, as well as plans to open 50 new stores and refurbish 30 existing outlets, by the close of the year. This followed news at the turn of the year that the German disruptor was planning to build new warehousing facilities outside Luton, Bedfordshire to service its stores around London.

Cyberspace strains

But the competition isn’t only intensifying for Tesco’s bricks-and-mortar operations, of course. Amazon, for example, has big ambitions to build its position in the online grocery market, as illustrated by its $1bn takeover of video doorbell and camera manufacturer Ring this week. The move is seen as an attempt by the US giant to boost its delivery capabilities by dropping off goods, like perishable items such as fruits and vegetables, directly inside customers’ homes.

Clearly Tesco has a lot of work in front of it to keep its recent sales uptick moving along, even if City analysts are confident it can battle through these choppy waters to follow earnings growth of 56% in the year to February 2018 with rises of 26% and 23% in fiscal 2019 and 2020 respectively.

I am not convinced however, and believe the tough trading backdrop caused by falling consumer spending power and the aforementioned competitive pressures leaves these projections looking a tad giddy.

In fact, a forward P/E ratio of 16 times looks a bit too toppy in my opinion in light of these factors. I reckon there are many superior FTSE 100 growth stocks to buy today.

Falling down

Travis Perkins (LSE: TPK) is another London-quoted retailer in trouble today.

Indeed, the builders’ merchant found its share price diving 9% in Wednesday business on the back of fresh, frightful financial news, meaning the share is now dealing at five-year lows around £13.

The FTSE 250 business announced that, although revenues rose 3.5% in 2017 to £6.4bn (or up 3.3% on a like-for-like basis), adjusted pre-tax profits slumped 10% last year to £343m.

Chief executive John Carter made a rather sobre assessment of the Travis Perkins performance, commenting: “2017 was a challenging year for the group, with continuing uncertainty in our end-markets, and declining consumer confidence throughout the year.” And the company now expects to make no profits improvement at all in 2018, it said, which comes as no surprise given the ongoing problems at its Plumbing & Heating division.

On the back of this guidance, broker expectations of a 5% earnings rebound this year, and a 7% advance in 2019, are looking a little flimsy right now. Despite its low forward P/E ratio of 11.3 times, I for one am not tempted to invest today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »