TA: Tesco: Are markets missing something?

4th Jan 2013 15:34

Tesco has outperformed in recent weeks but a divergence may have appeared between what analysts are forecasting and what market prices seems to show investors as increasingly discounting, namely a bounce-back in the company´s operating performance. Thus, analysts at Investec told clients on Thursday that: "Christmas started slowly and never got going. Stores were quiet and consumers were cautious. This is not a surprise as confidence, income and sales data running into Christmas were poor (...) Structural issues and cyclical problems are prevalent and we remain negative on the sector."More specifically, and for Tesco, who will publish a trading update on January 10th, this is what they said: "Tesco UK is up against weak comparables, has improved service and is likely to have been the relative winner over Christmas. We expect Tesco to deliver circa 1% like-for-like (LFL) for Christmas trading. But investors should be warned. This represents a significant volume decline, store profitability is under pressure as the internet and convenience channels cannibalise large store sales, and problems in Europe and Asia remain.As regards structural issues, Tesco and Sainsbury are likely to report strong internet and convenience growth, but the more these grow, the more sales from large stores fall. We estimate that Tesco and Sainsbury have underlying 3-5%, volume declines in core stores (closer to Morrisons than first appears). The market may take solace from fewer openings, but the problem of blurred channels and excess capacity growth (including virtual capacity) is growing.This, however, is Zak Mir´s -Senior Analyst, Institute of Trading and Portfolio Management - take on the current technical set-up: "Judging by the technicals the market has not only decided that Tesco is going to offer good news, but an event/update so positive that traders are taking the equivalent of a running jump - or leap of faith if you are a cynic. This is backed up by a wide unfilled gap to the upside at the start of December, another unfilled gap to start January, as well as the golden cross buy signal between the 50 and 200 day moving averages last month. Given the way that 2 unfilled gaps are only seen in the most positive of set ups, we would be looking for a minimum retest of a 2012 resistance line at 360p, with the big prize being the main falling 2011 resistance line at 380p by the end of February."Are markets missing something? AB