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On Wednesday, Bernstein analysts, led by William Woods, maintained an Outperform rating on Tesco (OTC:TSCDY) Plc. (TSCO:LN) (OTC: TSCDY) with a steady price target of GBP4.30. The analysis focused on the competitive landscape of UK Food Retail, weighing both public and private entities to assess profit share against market share. Tesco’s position appeared robust, commanding a 46% profit pool compared to its 28% market share, a figure 1.6 times greater. According to InvestingPro data, the company currently appears undervalued, with shares trading at a P/E ratio of 17.7x.
The report highlighted the importance of scaled distribution within the food retail sector, suggesting Tesco is engaged in a virtuous cycle of gaining market share while holding a significant portion of the profit pool. This advantage allows Tesco to further invest in and defend its market position, supported by strong financial performance with $91.4 billion in revenue and $2.5 billion in net income over the last twelve months. Bernstein underscored Tesco’s strengths, including competitive pricing, market scale, multi-channel presence, business momentum, and innovations in private label products and loyalty programs.
Tesco’s dominance is not seen as a result of overearning, but rather a reflection of resilient gross margins and a cost structure more optimized than those of the Big 4 competitors in the UK. Bernstein’s outlook suggests that Tesco is likely to continue reinvesting its profits to enhance customer offerings and maintain its market share, following a pattern established in previous years.
The analysis by Bernstein provides a comprehensive view of Tesco’s strategic positioning within the UK Food Retail market, emphasizing the company’s ability to leverage its profit pool for ongoing investment and market defense. Tesco’s stock rating and price target remain unchanged as the company navigates the competitive landscape.
In other recent news, Citi analysts have maintained their Buy rating on Tesco, with a steady price target of GBP4.25. The analysts have adjusted their model for Tesco in anticipation of the full-year 2024/2025 results, slightly reducing their forecasted sales excluding fuel by 0.5% due to challenges in the Booker and Central and Eastern Europe regions. Despite these adjustments, Tesco’s core UK business is expected to perform well, with fourth-quarter like-for-like retail sales projected to grow by 4.1%, surpassing the market consensus of 4.0%. The Republic of Ireland market is also anticipated to show resilience, with a 4.4% increase in sales.
Central and Eastern Europe is forecasted to experience a 3.0% rise in sales, exceeding the 2.1% market consensus. However, challenges persist for Tesco’s wholesale division, Booker, with an expected sales decline of 1.2%, which is more pessimistic than the consensus estimate. The full-year 2024/2025 Retail EBIT forecast remains unchanged at £2,942 million, aligning closely with the consensus and company guidance. Similarly, the Retail Free Cash Flow forecast stands at £1,806 million, surpassing both the consensus and company guidance range. Adjustments to earnings per share estimates show a minor decrease of 0.1% for 2025 and a slight increase of 0.1% for 2026.
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