A heavyweight City broker reckons shares in Tesco PLC (LON:TSCO) would have to fall by 20% before it represents decent value.
JP Morgan Cazenove, in a note to clients, made the call following the grocer’s interim results.
Detailed analysis revealed the quality of the earnings “beat” was “rather low”, it said.
“We separately believe [chief executive] Dave Lewis has set himself challenging targets in the context of a very difficult industry backdrop, where all the different moving parts are not within his own control,” the American bank added in a note to clients.
“We believe the shares price in the higher end of an optimistic guidance.”
JPMC reiterated its ‘underweight’ recommendation on the stock and its 135p a share valuation of the stock.
At 8.40am, Tesco was changing hands for 203p, down 2%.
On Wednesday Tesco said the all-important UK like-for-like revenues grew by 0.6% in the six months to August 27. That represented the third straight quarter of growth.
Volumes were up 2.1% and transactions were ahead 1.6%, which means Tesco cut prices to kick-start growth. In fact Tesco said prices had fallen 6% over the last two years.
The improvements leave the grocer “well placed” to achieve £1.2bn of operating profit for the full-year. In the six months the figure was £596mln on turnover of £24.4bn.
CEO Lewis and the team wants to rebuild operating margins to 3.5-4% by 2019/20 by implementing £1.5bn of further cost cuts.
"We have made further strong progress in the first half, with positive like-for-like sales growth across all parts of the group as we re-invest in our customer offer whilst rebuilding profitability in a sustainable way,” the Tesco boss added.