Tesco's valuation sparks divergent stances at Goldman Sachs and Bernstein

24th Apr 2015 14:52

There were contrasting opinions on Tesco's valuation between Wall Street heavyweights Sanford C Bernstein and Goldman Sachs after the UK supermarket group reported record losses this week.Looking at the 11% fall in Tesco's share price in recent weeks, you might think new holes had been found in the balance sheet and another profit warning had been issued, wrote Bernstein's outspoken Bruno Monteyne."This could not be further from the truth."The changes to the companny's indebtedness, due to a swelling pension deficit, were better than all forecasts, he wrote."Talk about re-investment and no margin-increase this year is actually very bullish guidance," he added, pointing to a projected exit rate this year of the UK profit margin that, he calculated, will take approximately a 160 basis-points year-on-year improvement to deliver.Monteyne said results provided more data for the strength of the UK recovery and saw "several catalysts in the coming 6 months confirming further progress and the recent sell off therefore provides a good new entry point".He reiterated his 'outperform' recommendation with a target price of 285p, compared to the price on Friday lunchtime of around 224p.This was in contrast with the 'sell' stance at Goldman Sachs, which was based around the fundamental structural changes in UK shopping habits that is felt will drive negative growth through traditional grocers' core stores."Tesco's long duration, high rent leases and the competitive dynamics of a highly concentrated market mean barriers to exiting stores are very high," Goldman wrote.This, along with negative leverage in international markets, which make up more than half of 2015 full year operating profits, will keep 2016 group profits flat.Although the bank's long-term analysis suggests upside to margins in the long-term with the stock trading at 25.4 times its 2016 expected price/earnings ratio, "we believe a greater margin recovery than is possible is being priced in".