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Deutsche Bank sees Tesco and J Sainsbury going in opposite directions

Deutsche Bank moved Tesco to a ‘buy’ from ‘hold’, while it went in the opposite direction with Sainsbury.
Tesco store front
“The volatility in the share price reflects Tesco’s UK trading performance.”

It was a day of contrasting fortunes for Tesco PLC (LON:TSCO) and J Sainsbury plc (LON:SBRY) after a leading investment bank reshuffled its recommendations for the food retail sector.

Deutsche Bank moved Tesco to a ‘buy’ (from ‘hold’), prompting a 1% rise in the share price, while it went in the opposite direction with Sainsbury, which chipped 1% from the company’s valuation.

Both changes were justified by Deutsche on valution grounds. Sainsbury is now within 9% of the house’s price target, while Tesco has 27% ‘upside’, it said.

The current Tesco share price underplays the potential for self-help measures to improve both profit margins and the return on investment.

However, Deutsche doesn’t expect the recovery to be plain sailing.

“The volatility in the share price reflects Tesco’s UK trading performance,” investors were told.

“We don’t see Tesco as being in that steady state where volume growth is the biggest driver of margin.

“Instead cost cutting and commercial gross margin gains are the biggest driver of margin development in the short to medium term.”

At 9.45am, Tesco shares were trading 2.15p higher at 188p, while Sainsbury’s were down 2.7p at 264p.

Of the 16 analysts logged as following Tesco only six are positive on the stock, according to the Brokerforecasts site. The City is even more bearish on the outlook for shares in Sainsbury with only two from 14 analysts in the ‘buy’ camp.

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