Buyers pile into Tesco after latest numbers

While peers and the wider stock market slump today, our head of markets reports heavy buying of Tesco. 

While peers and the wider stock market slump today, our head of markets reports heavy buying of Tesco (LSE:TSCO). 

In August 2014, Tesco had taken its eye off the ball, particularly with regard to its core UK business. The company issued a profit warning, slashed its dividend by 75% and brought forward the appointment of the new chief executive, Dave Lewis, by a month to 1st September. The general view of the shares was a definite sell, and the blow was one from which the share price has never really recovered, much less challenging the peaks of over 440p in April 2010.

Fast forward five years and the business is almost unrecognisable. The legacy Lewis leaves when he departs next summer is one of a company whose turnaround has been impressive to watch. 

Today's half-year numbers build further on this progress, with revenues rising above expectations, pre-tax profits forging ahead, underpinned by impressive operating profit and free cash flow numbers. Net debt has been reduced by 7.8%, group margin targets have been achieved ahead of plan and the cost savings programme remains focused. 

Meanwhile, in a clear show of confidence in prospects, the dividend has been increased by 59%, which will clearly boost what had been a pedestrian yield of 2.4%.

Source: TradingView Past performance is not a guide to future performance

Strategically, it is becoming increasingly apparent that the Booker acquisition was a masterstroke, while the tie-up with Carrefour and the launch of "Jack's" provide tantalising opportunities. The company is also planning to tighten the screw further on its rivals, such as new store openings and an increase in its online offering. Progress in Asia also looks promising and Thailand is being targeted for further growth.

This is not to say that Tesco has reached its peak. In this notoriously cut-throat sector, a new threat is always around the corner. That may have been in the form of the rise of the discounters, the potential emergence of Amazon (NASDAQ:AMZN) in this space directly or the next price war. Asda may yet find itself with a new owner which could bring fresh challenges to the incumbents. 

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The medium-term direction of the UK economy is, of course, open to debate, while in terms of this update, the revenues and operating profit numbers form Central Europe do not make pleasant reading.

Even so, there are more opportunities than threats for Tesco as it carves out its new strategic position. While the shares may not have reflected the progress being made, with an anaemic 1.2% rise in the price over the last year comparing to a 1.5% decline for the wider FTSE 100 index, the view on prospects is clear. 

The market consensus is that Tesco is comfortably the preferred play in the sector and comes in at a 'strong buy'.