Shore Capital analyst Clive Black said he thinks pressure on earnings is downward rather than upward at Tesco PLC (LSE:TSCO) following today’s half-year results and he has lowered his profit forecast for 2024 as a result.
Black said he now expects a flat year-on-year outcome in 2024 with his pre-tax profit forecast coming down to £1.94bn from £2.06bon but is leaving his 2023 forecast unchanged at £1.98bn.
He pointed out the food retail giant highlighted considerable uncertainty, which means the visibility and therefore reliability of its forward-looking thoughts are relatively low, which rarely helps investor sentiment.
Black said news that the group is maintaining its full-year 2023 guidance, albeit at the lower end of the range, will be a relief for some and he feels Tesco has executed well in the first half and that CEO Ken Murphy and his team deserve credit.
Quite what the future holds for Tesco's earnings, remains to be seen, Black said, and he is nervous for the 2024 earnings outcome in particular, highlighting a number of factors: persistent inflation, contracting living standards, Bank of England and UK government incompetence, elevated operating costs and higher gilt yields raising borrowing costs for shoppers and debt costs for businesses.
As for valuation Black noted the stock market has reflected these concerns with respect to the recent de-rating of the group's equity.
But he said until he can be more confident it is difficult to be more positive on the stock, adding “even with the recent equity rout, we sit rather uncomfortably on the recommendation bench with a hold stance.”