Broker snap: Citi upgrades Tesco, negatives priced in

3rd Oct 2013 09:24

Analysts at Citigroup have upgraded their rating for supermarket group Tesco from 'sell' to 'neutral' following the release of the company's first-half results, saying that negatives have already been priced in to the stock.The US bank admitted that there were "very few points of light" in the first half with poor like-for-like (LFL) sales, falling trading profit and cash from operations excluding working capital down heavily. Meanwhile, while momentum in the UK is still absent, push on pricing in Central Europe caused earnings to fall. "So why upgrade now? Simply stated, we fail to see much misperception about the company today," said analysts Alastair Johnston and Pradeep Pratti."For sure, we would consider market consensus earnings expectations to be too high. Our earnings per share [forecast] for FY14 is 10% below consensus and for FY15 15% below. But perhaps the low rating of the stock indicates the market's skepticism about the likelihood these numbers will be attained. Look at the reaction to the 1H13/14 numbers themselves: Tesco 'missed' consensus 6-7% but the share price has not budged relative to the market. Something is priced in."Citi said that company-compiled consensus earnings estimates expect 4% trading profit growth for the year to February 2015 and 5% growth for the year after, in line with Tesco's mid-single digit progression over the "medium term".The bank said: "Tesco has held its rating relative to Morrison but de-rated somewhat against Sainsbury. The market - we would suggest - understands perfectly well that all the incumbent UK grocers face earnings uncertainty in the future as discounter encroachment makes 'the day of reckoning' on industry gross margins an ever more realistic near-term prospect. We fully concur that the outlook for industry earnings looks bleak but, to a substantial degree, we think this may now be in the price."The stock was up 1.12% at 362.01p by mid-morning trade.In contrast, JPMorgan Cazenove cut its target price for the stock on Thursday from 350p to 335p and retained its 'underweight' rating, highlighting the £116m profit fill in the European region in the first half.BC