Tesco on special offer after being oversold

TESCO share prices tumbled to 397p last week after the announcement that chief executive Sir Terry Leahy was to step down after 14 years at the helm. Sales data released today is expected to be lacklustre, and combined with an expected weak consumer environment in the UK, Tesco’s margins in the near future look vulnerable (see chart).

Despite the dreary outlook for the UK, however, investors remain justifiably optimistic about Tesco’s longer-term prospects. All eyes this morning will be on international sales figures, which will be delivered by Philip Clarke, Tesco’s international director who is taking over from Leahy next year. As S&P Equity Research’s James Monro says: “There are a lot of candidates who might have wanted the job but they’ve gone for the guy with international experience.”
Tesco has taken advantage of its UK proceeds to invest internationally, particularly in the
US and China. While its US brand, Fresh & Easy, continues to deliver yearly losses since its 2007 launch, early indications suggest that it will be in a strong position to capitalise on a pick-up in US consumer confidence. A survey conducted by Execution Noble found that: “For the top 10 most important needs a retailer can meet, Fresh & Easy wins hands down.”

It is Asia, however, that is expected to drive the company’s long-term growth. Revenues from the region have more than doubled since 2007 to over £7bn, and Tesco has continued to hike capital expenditure throughout the recession, now boasting 88 stores in China and 137 in South Korea. Talk of an eastern slowdown hasn’t worried the retailer, which expects to expand its Asian floor space by 8.5m sq ft this year alone and, dissatisfied by the retail space available outside China’s major cities, plans to open nine brand new shopping malls. With such infrastructure in place, Tesco stands to take off as Chinese disposable incomes grow.

The recent sell-off is therefore a prime buying opportunity for contracts for difference
(CFD) traders, particularly because continuing low interest rates make contracts cheap to
hold, so you can afford to wait for growth to ramp up.

Monro puts a target price of 500p on the grocer’s shares while Collins Stewart’s target is a little lower at 490p. The Royal Bank of Scotland is more bullish, setting its target at 523p. And with Clarke set to bring greater international focus to the retailer next year, the drop in Tesco’ share price in recent weeks presents a chance for those not unduly put off by the departure of a familiar face.