Broker snap: Tesco still has promise, Shore Capital says

3rd Oct 2013 15:17

In a research note issued this afternoon analysts at Shore Capital have decided to retain their 'buy' stance on shares of Tesco despite the company's extremely poor results in Europe. However, what the broker most wants out of the firm are more cautious - and realistically achievable - forecasts. "Bruised but not battered, we retain our 'buy' stance," they go on to say.In that same vein, they highlight how the company's interim European earnings crashed by 68% year-on-year, versus their own recently downgraded estimates, which envisaged a decrease of 18%. "Management may signal the basis for a stronger second half, but it is likely to fall on many deaf ears; investors waiting for delivery rather than promises," Shore Capital says. As a consequence of the above these analysts have cut their forecasts for fiscal year 2013/2014 European trading profits by 50% to £150m (£529m reported in fiscal year 2011/12)."Frankly, we are tired of downgrades, and we implore management to set out expectations that can be realistically achieved. That said, we applaud steady steps in the improvement of the UK, the demonstrable Chinese progress and the exit from the USA; all helping earnings and cash flows."There is no point us defying reality and the disappointment of downgrades. However, if we felt our medium-term FCF thesis was bust we'd downgrade our stance too. Still trying to apply cautious forecasts, Tesco can still have strong FCF generation, build solvency ratios, grow dividends and engage in buy-back activity. The potential in this respect is outlined in the cash flow model in this note. Bruised but not battered, we retain our 'buy' stance."AB