Tesco's share price nears pre-overstatement level for the first time in four months

 
Catherine Neilan
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Tesco: Clawing its way back after a challenging few months (Source: Getty)
Tesco's share price is nearing the level it was before the supermarket admitting to overstating its profits in September, thanks to a sustained rally in the last month.
Shares in the UK's largest retailer have risen more than 30 per cent since mid-December and at pixel time this morning the business was up 2.1 per cent at 216.4p.
At its lowest, Tesco's share price fell to 164.8 per cent on December 12, down from nearly 230p on September 19. It took a double-digit dive the following Monday when it was revealed that under former chief executive Philip Clarke Tesco had stated its profits as being £250m more than they actually were.
The share price continued its decline as more bad news emerged: executives were suspended, market share was lost, the overstatement was revised to be in the region of £263m.
However, yesterday marked the first time it has risen above the closing price of September 22 (which was 205.9p), thanks to a month-long rally.
Here is how the share price has fared over the last four months.

How has that happened?

Last week's trading update was clearly a crucial part of its come-back, with new chief executive Dave Lewis unveiling a new pricing strategy, revealing a new UK boss and detailing plans to sell off part of the business, as well as close a bunch of stores.

Yesterday Kantar Worldpanel revealed that, for the 12 weeks to January 4, Tesco recorded its best performance in nearly a year, with sales falling at a smaller rate of 1.2 per cent year-on-year. Kantar called this a “notable improvement”, flagging that both Asda and Morrisons experienced a higher rate of decline (1.6 per cent).
But while the likes of Mike Ashley and Warren Buffett might be cheering the rally, not everyone is convinced. Moody's cut Tesco's bond status last week and Standard & Poor's has followed suit today.
Analysts at Espirito Santo have retained their sell recommendation, claiming the market has “aggressively” priced its recovery into its valuation.
“In order to generate a FY2018 PER multiple of 12-times, Tesco would need to generate a 231 per cent increase in UK EBIT over the next three years and a margin of 2.4 per cent implied by the current share price," the team said in a note this morning.
“While not unrealistic in our view, we think the market has already priced in a strong recovery in UK margins and we believe the shares reflect any two year upside from improving LFLs and margins, even as we expect there could be further downside risk to 1H15/16 due to deflation and Tesco’s continued adjustment of pricing.
“In addition, any margin gains in the UK will be scuttled by high financial charges for the next three years and its junk status could add further financial distress with any rise in global interest rates, in our view.”

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