Profit Warnings Come in Threes
It sounds like a bad joke: what’s worse than a profit warning? Answer: a profit warning that underestimates the problem by some £250 million. But Tesco (TSCO) investors aren’t laughing, as this profit ‘mis-statement’ caused the retailer’s share price to tumble by 8.5%. This dragged down other food retailers, most notably Sainsbury’s (SBRY), although it has had far more positive sales figures recently.
Tesco investors could be forgiven for wondering what bombshell will come next. The UK’s largest retailer was once a stock market favourite with private investors and the city alike, but its share price has halved as its market share has been nibbled away by both discounters, like Lidl, and the more upmarket brands of Waitrose and M&S Food (MKS).
This has led to Tesco issuing three consecutive profit downgrades. Pressure is mounting on its chairman, who as well as presiding over one of the worst trading periods in the supermarket’s history, now has to investigate serious internal accounting problems.
But Tesco remains an interesting proposition for investors. It is has fallen so far out of favour that some can scent a buying opportunity. Head of this contrarian band is Mike Ashley, owner of Sports Direct (SPD) and Newcastle United Football Club, who has essentially placed a £43 million bet that the shares will recover, via a ‘put option’ with Goldman Sachs.
It isn’t just billionaire investors that are backing Tesco. Hargreaves Lansdown reported this week that 92% of their Tesco trades were buys. The stockbroking firm had almost 30 times as many trades in this company as the previous week.
Clearly many private investors have the impression that this week’s falls may have gone too far. Indeed, Morningstar’s Ken Perkins sees the shares as undervalued compared to his long-term valuation of 300p.
But tread cautiously: there will be further independent investigations into these accounting problems. If they uncover wider problems, rating agencies including Morningstar have indicated the supermarket will be downgraded. Investors hoping to have the last laugh may find there is an unexpected sting in the punchline.
Not So Sweet Profit Warning
There was no sugar-coating to Tate & Lyle’s (TATE) profit warning this week, which caused its share price to fall by 17%.
The group blamed bad weather in the US, which hit it supply chain, as well as increased competition in the low-calorie ‘sweetener’ market.
It is now forecasting profits for the first half of this year to be in the region of £95-105 million. Full-year profits are expected to be between £230 million and £245 million—more than 20% below analysts’ expectations.
The company, which sold its sugar business in 2010, now focuses on artificial sweeteners and starches. Given the pressure from Governments worldwide for food manufacturers to reduce their sugar content, this should look like a good opportunity for investors. But Tate & Lyle’s profit warning shows how these policy initiatives can also adversely affect company fortunes.
Tate & Lyle has warned that sales volumes of its artificial sweetener, Splenda Sucralose will be lower than it forecast when it last updated the market in July. This is due to increased competition for sucralose and oversupply from China, which has pushed prices down. This has been combined with weaker fizzy drink sales in the US—due largely to health concerns.
The company is now reviewing its supply chains, to ensure they are more robust in the face of more extreme weather.
A number of industry analysts have downgraded the stock to a sell. Cannacord said: “The deterioration in Sucralose pricing over the last two months is particularly distressing.” Morningstar’s consensus reading is currently hovering between hold and a weak sell. Investors may want to stay clear until longer term pricing becomes more stable.
Are you Right to Buy Mothercare?
There may be one reason to invest in discounted Mothercare (MTC) shares that are part of a planned £100 million rights issue. Its new boss Mark Newton-Jones is investing £400,000 of his own money, so he certainly has a strong incentive to ensure the funds raised are used to turn the ailing company around.
But there are also good reasons to stay clear. As its trading statement made clear this week, times have been tough for the mother-and-baby retailer.
Mothercare has not paid a dividend to shareholders since February 2012 and on Tuesday it said it didn’t envisage these payments starting ‘in the medium term’. Not surprisingly its share price fell on the announcement of this rights issue.
The firm, which has closed 153 stores in the last three years, plans to shut up to 75 more in the next financial year. The money raised by this rights issue will be used to pay off leases in these loss-making outlets, close smaller high street shops and invest more into its larger out of town stores, in a bid to return the core UK business to profitability.
Mothercare is also planning to focus more on its international and online business, where it believes there is greater scope for expansion.
The rights issues is underwritten by Numis Securities, JP Morgan Cazenove and HSBC, so the funds will be raised even if shareholders do not sign up.
For existing shareholders the question is whether they want to buy further shares in this struggling company, even at a deeply discounted rate.
