Notwithstanding the world’s most famous investor Warren Buffett – who has a four per cent stake in Tesco - the profit downgrade has hit some of the UK’s top managers.
Tesco, as well as Morrisons, has had a torrid year mostly due to the rapid rise in popularity of the discounters – the likes of Aldi and Lidl – who have undercut the pair and forced them into a price war that has eaten into their underlying profits.
The two supermarkets have seen their business suffer as the food retail market becomes increasingly polarised between the discounters and the higher end of the market, mostly from Waitrose and Ocado. Meanwhile, consumers increasingly favour online shopping.
Morrisons was late to the online market, having yet to launch its proposed tie-up with Ocado, while Tesco’s huge portfolio makes part of its core business vulnerable to a greater online presence.
Both Tesco and Morrisons’ share prices have tanked over the past year. Tesco has lost 36.24 per cent and Morrisons has lost 33.88 per cent; by comparison the FTSE All Share has risen 6.93 per cent.
Performance of stocks and index over 1yr
Source: FE Analytics
Tesco has been the worst performer in the FTSE 100 this year while Morrisons has been the second worst.
Alastair Mundy (pictured), who manages the £1.3bn Investec UK Special Situations fund, bought into the stock back in April telling FE Trustnet that Tesco – as well as Morrisons – represented most of the scant value left in UK equity markets.Mundy currently has Tesco as his 13th largest position with 2.9 per cent of the portfolio in the stock while Morrisons is a much smaller holding at 0.7 per cent.
However, the manager - who has built a reputation as being a somewhat of a contrarian with deep value investment style and a reasonably high cash weighting of 10 per cent - is sticking with the beleaguered retailer and is not planning to dump the stock.
“On a bigger picture we think this strengthens the new CEO to do ‘whatever it takes’ to reinvigorate Tesco,” he said.
Despite Mundy’s bearish stance and high level of cash, the manager has returned 55.46 per cent over three years compared to an IMA UK All Companies sector average of 52.3 per cent while the FTSE All Share has gained 48.55 per cent.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Seven funds have Tesco as a top 10 holding, including the $2.2bn Schroder ISF Global Dividend Maximiser, £700m Schroder ISF Global Equity Yield, £140m Old Mutual Equity 2 and £520m SJP International Equity funds.
Kevin Murphy and Nick Kirrage, who run the £630m Schroder Recovery fund, also own the stock with 2.11 per cent in the fund as well as 3.76 per cent in Morrisons. The pair also the run the five crown-rated £1.5bn Schroder Income fund, which has 3.82 per cent in Tesco and 3.31 per cent in Morrisons.
Today, new Tesco CEO Dave Lewis, who took the helm on 1 September, said the firm has suspended four senior executives, including its UK managing director, as it had inflated its half-year profit guidance by £250m.
He said the fault was due to a mistake in accounting while preparing to publish its forthcoming results, which were expected on 1 October but have now been pushed back to 23 October.
Other managers who have been eyeing positions in the supermarkets include Rathbone’s Julian Chillingworth, Miton’s George Godber, Old Mutual’s Richard Buxton and Slater Investment’s Mark Slater, but none have done so yet.
Since August 1995, as far as our data goes back, Tesco has seen a large increase in share price due a period of rapid expansion overseas as well as a revolutionary approach to data gathering via its pioneering Tesco Club Card, both steered by its long-term CEO Sir Terry Leahy.
Performance of stocks and index since Aug 1995
Source: FE Analytics
However, since Leahy’s departure three years ago its share price is down more than 38 per cent.
Simon Gergel, chief investment officer for UK equities at Allianz Global Investors, says the two supermarkets could be set for a significant re-rating.
“After Tesco has slashed its dividend as its new chief executive joined and William Morrison has announced a halving in underlying first half profits, the food retail sector is more unpopular than ever,” he said.
“Only 22 per cent of analyst recommendations for Tesco are ‘buy’ compared to 60 per cent when Sir Terry Leahy departed in 2011.”
“One thing is clear; if the major food retailers recover their poise, the share price reaction will be significant as investor sentiment and valuations are depressed.The only thing more polarised than the food retail market itself is the views of investors in the sector.”
Alastair McCaig, market analyst at IG, says Tesco’s downgrade may be spell further woes for the supermarket.
“Considering all the problems that Tesco is tackling at the moment, with its market share being eaten into, profit margins being squeezed and its competitors starting a price war, poor internal accounting issues was the last of its needs,” he said.
“The food retailer has now suffered four profit downgrades in a row, and the more cynically minded investors will be asking how much more than the reported £250m black hole the investigative accountants might find.”
