Tesco investors celebrate emerging market success

A rise in half-year profits is a sign that Tesco is still a good bet for investors who want access to the growing consumer story in emerging markets, according to The Share Centre’s Graham Spooner.

"Growth-seeking investors attracted by the company’s international earnings and potential for sustainable growth will be pleased to hear the majority of the company’s growth came from foreign markets," he said.

Sales in Asia were up 11.9 per cent, with profits increasing by 18.7 per cent. European sales also increased, up 7.8 per cent, and profits rose to £237m – up 11.8 per cent. Group sales rose by a total of £35.5bn.

However, figures in the UK remained relatively flat as consumer confidence and the price of motoring have taken their toll.

"The on-going economic pressures have impacted consumer spending and the UK market has struggled the most," added Spooner.

"This was highlighted by like-for-like sales which fell by 0.5 per cent. The retailer has launched a price-discount campaign in an effort to increase these levels."

Data from FE Analytics shows that 56 funds list Tesco in their top-10 holdings, including the £2bn Newton Higher Income fund and the £780m JOHCM UK Opportunities fund.

"Tesco remains our preferred play in the sector largely due to its international arm," Spooner continued. "We recommend investors buy for the longer-term, however as there is an increasing chance the situation could worsen for consumers we suggest not chasing the stock higher."

Rival Sainsbury’s fared slightly better within the UK market. Like-for-like sales surpassed expectations, growing by 1.9 per cent.

"The company has upped the number of non-food products and can now compete with the likes of Tesco and Asda," said Spooner. "Sainsbury’s is focusing on promoting its own brands, offering quality at a lower price. Back-to-school sales also helped accelerate growth, increasing by 40 per cent."

Spooner believes that Sainsbury’s could prove a decent bet for investors who think the stock has been unfairly hammered by falling equity prices.

"The share price has been underperforming others in the sector so far this year, falling by around 30 per cent. For a share that provides an essential product, some may think this is an over-reaction and there is a chance the retailer could hold its position in a difficult market."

"At current levels, Sainsbury’s could be perceived as a safer haven over the coming months as the troubled economic climate continues. Investors may be enticed by Sainsbury’s attractive yield of 5 per cent. However, uncertainty for 2012 remains and the retailer is swimming against the tide, so we continue to recommend investors hold Sainsbury’s for now."