Shares in Tesco PLC (LSE:TSCO) fell on Wednesday after Shore Capital downgraded Britain's largest supermarket group for the first time in more than three years, arguing the shares have run far enough for now.
The stock was down 2.6% at 449.7p in late morning trading, valuing the FTSE 100 company at roughly £28 billion.
Clive Black and Darren Shirley cut their recommendation to hold from buy, a rating the broker had maintained since March 2023, and reduced their target price to 480p from 525p.
Crucially, they made no change to earnings forecasts.
The downgrade is a judgement on valuation and momentum rather than on Tesco's operational performance, which the analysts described as an outstanding execution record built on market share gains and the Clubcard loyalty scheme.
Black said the shares were fairly valued at about 15 times forecast earnings, an equity rating he considered deserved but difficult to push higher from here.
The bigger obstacle is Tesco's own success.
Years of share gains have created tough comparative figures that the company must now beat, a challenge Black described as a mountain that has become a headwind.
He pointed to a slightly tighter trading environment, with summer grocery volumes on the light side even as sales growth holds at 3% to 4%, and grocers absorbing costs to shield shoppers from inflation.
Branded suppliers losing ground to supermarket own-label products are competing harder, while hot weather, the World Cup shifting spending towards pubs and restaurants, and the growing use of weight-loss drugs are all weighing on basket sizes.
Recent market share data suggests Tesco is now roughly holding position rather than gaining.
Shore also noted the fuel discount Tesco introduced this month.
Black said an upgrade to earnings guidance at the half-year results on 8 October now looked a stretch, with the new year the more likely moment for a reappraisal.
